The Federal Open Markets Committee (FOMC) announced yesterday it has raised the US Federal Funds Rate by 25 basis points to between 0.5 per cent and 0.75 per cent.
The previous rate hike was almost exactly a year ago on 17 December 2015, and was the first time the Federal Reserve had tightened monetary policy since 2006.
Following the December 2015 rate hike the FOMC forecast four more rate hikes throughout 2016. Instead, yesterday’s increase to the Fed Funds Rate was the only move for the year.
The famous ‘blue dots’ graph that forecasts FOMC monetary policy (by surveying the opinions of the FOMC members) is now projecting monetary policy will be in the vicinity of 1.5 per cent in 2017 – equating to three hikes throughout the year.
In its announcement of the decision to hike rates, the FOMC noted that “near-term risks to the economic outlook appear roughly balanced”.
US economic growth is strengthening at a “moderate pace” and job growth has been solid in the final quarter of 2016, said the FOMC.
“Inflation is expected to rise to 2 per cent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further,” it said.
“Near-term risks to the economic outlook appear roughly balanced. The committee continues to closely monitor inflation indicators and global economic and financial developments.”
AMP Capital chief economist Shane Oliver said that the hike signals a stronger US economy, which in turn is good for Australia.
“It doesn’t signal that the RBA will soon follow and hike next year though. With the Australian economy remaining weaker relative to its potential than the US and inflation running further below target, we remain of the view that the RBA will be cutting rates again in 2017, not hiking them,” Mr Oliver said.
“The main relevance of the US rate hike is that it helps keep the Australian dollar down. This is essential if Australia is to continue rebalancing its economy as mining investment continues to unwind and the housing construction cycle peaks in 2017.”
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