Federal Reserve officials say a cut in base interest rates is unlikely in the coming months due to the robust pace of economic expansion, while further rate hikes are not expected either amid a lack of inflation and low labour participation rate.
Kristian Rouz — US central bankers have dismissed speculations that the Federal Reserve could cut its borrowing costs this year, suggesting such a move would be unnecessary due to the ongoing economic expansion and declining unemployment rate. However, US President Donald Trump says a rate cut could energise the US economy, arguably pushing it above 4 percent annual expansion.
According to a series of recent statements by Fed Chairman Jerome Powell and Vice Chair Richard Clarida, the central bank’s Board of Governors will not undertake precautionary rate cuts to spur economic growth at this time. Officials believe base borrowing costs, currently set at 2.5 percent, are accommodative enough, while looser monetary policies could threaten to overheat the economy, bringing on potential asset bubbles.
Rates are expected to remain stable or modestly higher in case inflation picks up, unless a sudden economic shock prompts Fed officials to respond.
“With the economy operating at or close to the Fed’s dual-mandate objectives… we can, I believe, afford to be data-dependent”, Clarida said in a speech at Stanford University’s Hoover Institution.
However, Fed rates aren’t expected to go up either — as core US inflation, excluding food and fuel costs, was just 1.5 percent in February and 1.9 percent the following month — which is below the Fed’s 2-percent target. Inflation remains tepid despite the labour market being at “full employment”, with the jobless rate at just 3.6 percent as of April.
“On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent”, US central bankers said in the Fed’s most recent policy statement.
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Economists have expressed concern with the persistently low US labour participation rate, which was at 62.8 percent last month — below January’s 63.2 percent, and far below the all-time high of 67.30 percent posted back in 2000.
Officials believe inflation could gain momentum if labour productivity and work participation improve down the line — in that case, the Fed could continue to hike rates. But a rate cut is almost off the table.
“I don’t see much evidence that inflation expectations are moving down. They have been relatively stable. I don’t see a compelling case that we have lost credibility on the inflation target”, President of the Federal Reserve Bank of Cleveland Loretta Meister said.
For his part, Chairman Powell believes the Fed’s cautious and data-dependent approach is the best road to take at this point. The US economy remains one of the best-performing in the world, while its key trading partners China and the UK are also doing better than forecasts had suggested for the past two years.
However, recessionary pressures in the EU, currency crises in Turkey and Argentina, along with the slowing global demand for consumer goods and commodities pose a longer-term concern for US policymakers.
Additionally, while Trump and his White House officials believe they would be able to strike a series of bilateral trade deals across the globe, the risk of disruptions in trade with EU, China, and the nations of Southeast Asia remains quite high.
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Meanwhile, US economic growth for the first quarter of this year came in at 3.2 percent — far above earlier expectations, as experts believed the partial government shutdown at the beginning of the year and harsh winter conditions could have weighed on the pace of GDP expansion. That didn’t happen, and forward-looking projections suggest the US economy could accelerate to above 4 percent annual expansion in the second half of the year.
But some policymakers are cautious, saying some underlying weakness remains, while the economy is in its late-cycle expansion phase — meaning, it would now take less to trigger an economic downturn.
“I think it’s still my view that we are running out of the capacity in the workforce”, Dallas Fed President Robert Kaplan said. “I would expect it’s going to slow down but I don’t think it’s going to be a bad sign”.
Fed officials have reaffirmed they will watch the developments in ongoing trade talks with China, as well as monitor the global economic landscape to identify and tackle risks at an early stage. Overall, the course of monetary policy is expected to remain stable in the upcoming months.