In its first meeting since Donald Trump became president of the USA, the Federal Reserve has left interest rates unchanged. This means that interest rates are maintained in a band from 0.5 to 0.75%. The decision is hardly unexpected given the relatively shallow recovery that has persisted since the Global Financial Crisis and the modest (in historic terms) level of inflation and since it raised rates as recently as December 2016; that being only the second rate hike in a decade.
The details of the economic policies to be followed by the new US administration are yet to come into sharp focus, but the rhetoric talks of tax cuts, deregulation and public spending increases in an attempt to boost growth, but this approach also risks stoking inflation in parallel.
The comments made by the Fed were regarded as being Bullish about the US economy. The Fed noted that economic activity and the jobs market continue to strengthen, despite the US being close to what economists view as “full employment” (US jobs data will be released at the end of this week). The Fed believes that US inflation will hit 2% over the “medium term” and Janet Yellen warned last month that the nation risked a “nasty surprise” on inflation if the Fed was too tardy in hiking interest rates which are seen as a brake on inflation. However, no suggestion was made on the timetable for rate increases going forwards, but the Fed has made it clear that a gradual approach to such increases has been adopted.
Analysts expect two rate increases this year, probably of 0.25% each, but others are suggesting that the Fed will wait to see what the Trump administration is planning to do and how it affects the world’s largest economy before acting. US annual growth in Q4 came in at 1.9%, markedly lower than the Q3 figure of 3.5% (US quarterly growth figures are expressed as annual rates).