US economy

Strong US economy puts Fed on track for December rate rise


The Federal Reserve stayed on course for further increases in short-term interest rates, with the next move widely expected as soon as December, as the central bank attempts to keep the economy on an even keel as the labour market strengthens rapidly.

The Federal Open Market Committee kept its target range at 2-2.25 per cent on Thursday, and gave a bullish verdict on the US economy, noting that unemployment had dropped further as growth in economic activity and household spending remained strong. Investment growth, the committee noted, has decelerated compared with earlier this year.

The rates decision by the Fed, chaired by Jay Powell, comes as the central bank continues its gradual march to tighter monetary policy. Wage growth has accelerated to its quickest pace in almost a decade, job gains are averaging more than 200,000 a month, unemployment is hovering at multi-decade lows, and the economy has recorded two straight quarters of annualised growth well in excess of 3 per cent.

With inflation close to target, the central bank last lifted its key rate in September and policymakers have made it clear that further rises remain in prospect as they move policy to neutral settings. At the same time, the central bank is steadily reining in the size of its balance sheet, which was swelled by crisis-era stimulus measures.

“Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the central bank said. “Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.”

The Fed has boosted rates eight times in the current cycle, with a further one predicted to come at the December 18-19 meeting. A move was not expected at this month’s two-day policy meeting, which comes in the aftermath of high-stakes midterm elections that saw the Democrats retake the House of Representatives and the Republicans hold the Senate.

Although the Fed continued to have a bullish view of the US economy, it made no mention of the recent market turbulence which President Trump has blamed on the central bank’s gradual rate tightening.

The Fed’s statement repeated its recent guidance that further “gradual increases” in the target range for rates are expected, noting that both headline and core inflation are near its 2 per cent target. “Risks to the economic outlook appear roughly balanced,” it added.

The central bank’s debate over how to keep the simmering US economy from overheating is taking place against a backdrop of repeated attacks from President Donald Trump, who has accused the Fed of being out of control and called the institution his “biggest threat”. Mr Powell insists the central bank is “removed from the political process” and will continue to try to do the right thing for the economy.

Despite Mr Trump’s complaints, the Fed’s current tightening cycle remains a cautious one, and officials have been signalling there is no need for aggressive upward moves. Richard Clarida, the Fed’s newly arrived vice-chairman, said in a speech last month that there is room for the US jobs market to strengthen further without stoking excessive inflation.

“With unemployment falling and wage gains thus far in line with productivity and expected inflation, the traditional indicators of cost-push price pressure are not flashing red right now,” Mr Clarida said.



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