The Fed is more optimistic than ever!

USA - Sep 28 2018

Weekly food for thought

The Federal Reserve (Fed) raised interest rates on Wednesday, the 26th of September, and left intact its plans to steadily tighten monetary policy, as it forecasts that the U.S. economy would enjoy at least three more years of growth. 

In a statement that marked the end of the “accommodative” monetary policy era, Fed policymakers raised the benchmark overnight lending rate by 0.25 percentage point to a range of 2.00 to 2.25%. The Fed still foresees another rate hike in December 2018, three more in 2019, and one (last) increase in 2020. That would put the benchmark overnight lending rate to a range of 3.25 to 3.50%, roughly half a percentage point above the Fed’s estimated “neutral” rate of interest, at which rates neither stimulate nor restrict the economy.

Pay attention to the yield curve inversion: Fed funds vs. 2-year and 10-year benchmark interest rates

The Fed sees the economy growing at a faster-than-expected 3.1% this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2% target. The Fed is trying to anchor expectations in the medium term while continuing to tighten its monetary policy. This could help to avoid a yield curve inversion, a signal that is still a precursor to a future recession in the United States. The 2-year and 10-year interest rates remain close and a rise of uncertainties, especially at the political level, could come into play and trigger a United States recession. What is almost certain and assumed by the Fed is that the U.S. economy seems to have reached a peak this year, and that growth should remain strong albeit weaker than in 2018 in the short to medium term.

Julien Moussavi, Head of Economic Research - Sources: Beyond Ratings

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