With unemployment at its lowest ebb for ten years and at pre-Financial Crisis Levels and inflation at 2.7%, a five year high and above the target figure of 2%, but well below the historical average of 3.29% (1914-2017), perhaps the Fed can afford to feel relaxed about the economy.
In comments that Federal Reserve Chairman Janet Yellen made to an audience at the University of Michigan’s Ford School of public policy, Ms Yellen noted that: “before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could. Now allowing the economy to kind of coast and remain on an even keel - to give it some gas but not so much that we are pressing down hard on the accelerator - that's a better stance of monetary policy. We think a gradual path of increases in short-term interest rates can get us to where we need to be, but we don't want to wait too long to have that happen".
Most observers think that the Federal Reserve will probably increase interest rates twice more before the end of the year. It is likely that the policy of making incremental 0.25% adjustments which started (and then faltered) in December 2015 will continue. Rates had been on hold for almost nine years at 0.25%. The first incremental rise was 0.25% in December 2015 which was mirrored twelve months later. This March a third rate rise occurred, taking the Fed’s interest rate to 1%. If indeed there are two further rises in the course of 2017, taking the rate to 1.5% it will still be significantly below the long-term average value of 5.81% (1971-2017). The use of interest rate policy to either stave off inflation (by raising rates) or boost the economy by making borrowing cheaper (by dropping rates) only works if the central bank has room for manoeuvre – at historically low rates, only the action against inflationary pressure is possible, hence the Fed’s wish to normalise rates, at least somewhat.