US Fed opens the door for several rate hikes this year

USA Fed Tax Hike
With the US Federal Open Market Committee voting for the second time in four months to raise the fed-funds rate, the implications on the US economy are investigated by Research Analyst Kamen Parushev.
USA Fed Tax Hike

By Kamen Parushev - Research Analyst

This month the Federal Open Market Committee (FOMC) voted to raise its benchmark fed-funds rate by a quarter percentage point, to a range of 0.75% to 1%. Including the increase in December 2016, this is the second hike in just four months. The hikes are in line with FOMC’s plans for gradual tightening and further adjustments in the stance of monetary policy if the labor market continues to strengthen and economic activity continues to expand. Fed officials are signaling two more increases in the administered interest rates, for a total of three adjustments in 2017 so far.

The consistent downward trend in unemployment rate and subsequent employment increase indicate substantial recovery of the US labour market. Over the last few years the unemployment rate has fallen from 10% in the peak of the economic crisis to 4.7% in February 2017, close to the lowest 4.4% pre-crisis level. In addition, jobless claims have been following a similar trend. Since the beginning of the year average weekly initial claims for state unemployment benefits decreased to 247, 000 – over 9% decrease compared to 272, 000 weekly average in the corresponding period of 2016. Last month the employment to population ratio reached 60% for the first time in the last 8 years. However, despite the solid job gains and the upward trend in the last two years, the employment ratio is still far below its pre-crisis levels, indicating underutilization of the labour resources and possible shift in the US economy potential level.

The recent data on most key indicators show a modest growth in the US economic activity last year. In 2016, the United States saw the slowest economic growth in five years. The US economy recorded 1.6% growth, lower than its 2.6% growth posted in 2015. Last year private consumption expenditure had an annual increase of 3.8%, while the growth in January 2017 was 4.7%. Growth of private fixed investment continued to slow down for a second consecutive year, falling to 1.8% in 2016 - the slowest pace since 2010.

Likewise, housing and automobile sectors declined in 2016. Private building permits issued posted negative growth of -0.5% year-on-year, although first couple of months of 2017 showed signs of improvement. The volume of motor vehicle sales recorded had a marginal increase, marking the slowest growth rate since 2009.

Inflation, however, which has long been running below the 2% target, is now approaching that rate. The personal consumption expenditure (PCE) price index, one of the measures of inflation monitored by the FOMC, reached 1.9% in January. PCE price index adjusted for food and energy price, a measure of core inflation, also got near the Fed’s 2% target rate, increasing 1.74% in the first month of 2017.

In addition, market-based inflation expectations also suggest inflationary pressure. In recent months the TIPS (Treasury Inflation Protected Securities) breakeven rates, the spread of TIPS yield and Treasury notes yield, reached their highest levels since mid-2014 when the fall of oil prices started.

US Inflation

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31st March 2017 US Fed opens the door for several rate hikes this year