US Fed lifts rates, with more in store

As expected, the Federal Reserve (Fed) raised interest rates by 25 basis points (bps) last night taking its target rate to 2-2.25%. The statement remained upbeat on the economy saying that economic activity had been rising at a strong rate and there was little concern expressed over the potential impact from trade wars, the stronger dollar or emerging market volatility.

In the press conference, Fed chair Powell did acknowledge business concerns on the trade wars, but noted that these were not apparent in the data as yet. The Fed did, however, drop its description of monetary policy as “accommodative” - a signal that it sees rates as being closer to neutral.

Our view remains that the Fed will raise rates three more times to take the policy rate to 3% by mid-2019. At that stage, growth should be cooling as the economy feels the effects of higher rates and the fiscal stimulus fades. Higher tariffs are also likely to be weighing on activity, allowing the Fed to stand back.

For more on the latest escalation in the trade wars, see Trade wars step up, more to come. The forthcoming October Economic & Strategy Viewpoint will also cover the trade wars in more depth.