As widely predicted, Janet Yellen announced that the Federal Reserve was raising its main interest rate by a further 0.25% increment. This is the third hike since December 2015 and, indeed, only the third increase in a decade. The increase takes the interest rate up to a range from 0.75% to 1%. For comparison, the historic average US interest rate stands at 5.81% (1971 to 2017). The range on the interest rate runs from a record low of 0.25% (from December 2008 until December 2015) and high of 20%, seen in March 1980.
Traditionally (when not dealing with the largest financial crisis since the Great Depression) central banks use interest rates as a tool to either stimulate economic activity, by reducing rates, or to choke of inflation, by increasing the costs of borrowing with a rate increase. Part of the rationale of the Fed’s normalisation policy for interest rates is to “re-arm” monetary policy by giving the central bank room for manoeuvre over interest rates. For this reason, analysts are expecting further incremental upticks over the course of the year.
Commenting on the Fed’s decision for a modest increase in the light of solid US economic performance, Ms Yellen noted: "Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market and a sustained return to 2% inflation".
The Fed is predicting that the US economy will grow at 2.1% this year and next before slowing slightly to 1.9% in 2019, but these projections will be sensitive to the economic policies and tax cuts that Mr Trump can push through; he is calling for growth of 4%, but is also supportive of an “America first” protectionist approach which could backfire badly in a hugely interconnected world.