The Fed’s Positive Economic Outlook: The Continuation of Rising Interest Rates Amongst a Potential Trade War
For the eighth time since 2015, the Federal Reserve of the United States has raised its interest rate; now to the range of 2-2.25%. As the central bank of the United States, the Fed is unarguably one of the most powerful institutions worldwide. Its outlook on the US economy is therefore not only one of extreme authority, but also one with predictive capabilities. By raising interest rates, and stating that a further raise is imminent, the Fed signals its confidence in the continuation of economic growth under the Trump administration.
How are interest rates used to influence the economy?
Manipulation of interest rates is the most common means by which any central bank exerts control over an economy, attempting to balance the levels of growth and inflation. Lower interest rates incentivize investments and consumption by lowering the costs of borrowing; higher interest rates thus lead to more savings. Whilst maximizing economic growth then seems like the logical goal, the uncontrolled inflation that would result would have an adverse effect on the overall well being of an economy.
Since the 2008 financial crises, interest rates have purposefully been kept low in order to continue the investment into new business and further stimulate recovery. Higher rates are often accompanied by a drop in US stocks, and the president‘s public disapproval will only make the Fed‘s job more difficult.
What does this say about Trump’s trade war?
Although president Trump has broken tradition and criticized monetary policy as economic tool, the higher rates are an indication that, contrary to the beliefs of his critics, his trade war will unlikely derail economic growth by any notable amount. On Monday, $200 billion of imported goods from China have received further tariffs. In theory, tariffs on imports benefit domestic producers, yet act as a tax on consumers, who now pay higher prices for domestic products instead of cheaper foreign ones. By increasing prices in this manner, many have noted how Trump’s trade policy may hinder his targeted three percent economic growth, yet this sentiment is clearly not shared by officials at the Federal Reserve.
The future of the US economy is optimistic on all accounts, despite the heating trade tensions. The Fed is attempting, as times before, a slow landing for the US economic growth levels. Whilst the Trump administration is seeking to increase growth levels over the next 2 to (potentially) 6 years, the Fed hopes growth will have slowed down to 1.8% by 2021. The recent political and economic climate has produced that which previously seemed impossible. It is to be seen whether this trend continues.
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