This week the Federal Reserve met investors’ expectations completely by implementing another increase in interest rates by .25 basis points, bringing the rate in the United States up to 2.25%. This hike was well-anticipated, with a likelihood at above 80%. It is yet another testament to the Federal Reserve’s commitment to a hawkish monetary policy. But would that continue in this way and what does this mean for the American economy? Let’s find out.
First off, we need to talk about inflation. After all, it is rising inflation rates that are the main grounds for the Fed to hike interest rates. With record-low unemployment and rising wages, more and more people in the United States have money at their disposal, which they spend. As people try to buy more goods and services, based on the principles of demand and supply, prices rise slightly (so that the goods go to the buyers who can afford them). This is a sign of a healthy economy.
However, there is a level when unchecked inflation can become quite dangerous. If it’s left to rise to no end, inflation causes the value of the national currency to drop, which makes it difficult to deal with international transactions and debt. Sounds familiar? This is what’s going on in Turkey right now, where record high inflation has made Turkey’s loans in USD really difficult to pay back.
Of course, the United States are very far from that. Inflation is still within healthy values (generally those are seen as the levels around 2-3%). But to keep it that way, the Federal Reserve has raised interest rates slightly, several times. In practice, this slows down inflation growth so that the economy can remain stable. Without a doubt this policy has had a very positive effect on the American economy. Bond yields are at a very attractive level just above 3% and the major US stock indices (S&P 500, Dow Jones) are soaring.
Nevertheless, there is some concern regarding what the Federal Reserve is doing. The low interest rates put into place after the 2008 economic crisis made borrowing money cheap, so many businesses took out massive loans which allowed them to continue in operation, leading to the current booming economy. When rates go up, however, that makes those same companies owe more money back than they initially took out and this could put a strain on them.
The Fed is expected to hike rates for the fourth time this year in December. If inflation remains on the rise, more interest rate increases are likely in store for 2019, but many analysts are beginning to expect a winding down of that hawkish approach, hoping that the economy will reach a balance that would not be too harsh on American businesses. In other words, while the Fed’s hawkishness made the central bank’s moves more or less predictable in the last few years, 2019 and 2020 are shrouded in mystery. Not to mention that the currently ongoing trade war with China will likely show more and more significant results in the economy, which may give the Fed pause.
In any event, for now the course of the dollar is certain: bullishness and strength. We hope you get to enjoy it and trade smart while it lasts.