The Federal Reserve (Fed) has set the stage for raising US interest rates on Wednesday, thanks to the heyday of employment and the optimism that has prevailed in markets since President Donald Trump took office.
If the central bank needed a boost, it came on Friday when the job market showed strong job creation in February and fell by a tenth of a percentage point to 4.7% of the unemployment rate.
Even before that report, and despite questions about Trump’s economic agenda, influential members of the Fed’s monetary policy committee (FOMC) gave clear signals that rates could increase.
The FOMC will begin its two-day meeting on Tuesday, March 14 and the next day will announce its decision.
The Fed’s Vice President Stanley Fischer said members of the organization made a “conscious effort” to fuel the expectations of the people. “And I’m about to join,” he said.
Analysts say the Fed has already reached employment and inflation targets despite other not-so-good economic data.
“It’s really a simple decision,” Mickey Levy, an economist at Berenberg Capital Markets, told AFP. “Virtually (the Fed) has already reached its double mandate” of looking after employment and inflation, he said.
On Friday, a Fed poll showed that 93% of the market believes it will be announced an increase rates of 0.25 percentage points.
The world’s largest economy has been creating jobs since mid-2016 and the unemployment rate remains below 5% since last May.
On the inflation side, the consumer price index registered its highest annual rate in 4 years and stood at 1.9%, scratching the 2% target the Fed considers ideal.
In addition, consumer confidence came in February to its highest point in 15 years.
Despite that scenario, Fed Governor Lael Brainard said there is still “room for further improvement in the economy”.
Brainard noted that core inflation, which excludes volatile food and energy prices, has been below the FED target in the past 8 years.
In addition, too many workers between the ages of 25 and 54 are out of the job market, and equally too many part-time employees have difficulty working full-time.
Steven Ricchiuto of Mizuho Securities admitted that, beyond employment and inflation, other US indicators are less convincing.
He mentioned, for example, modest GDP growth (1.9%) in the fourth quarter of 2016 and a growing trade deficit, which is bound to affect growth in the current quarter.
In January, personal consumption also fell, largely because the winter was warmer than normal and that lowered the household energy bill. Industrial production also fell, the sale of cars disappointed and the start of construction of homes dropped.
Moreover, given the political turmoil in Congress, it is not clear when, or whether Trump’s promised economic stimulus policy will kick off and sparked Wall Street euphoria.
The Fed has said it may need to raise interest rates faster if Trump fulfills its promise to cut taxes and increase public spending.
However, Levy said that, adjusted for inflation, rates are currently negative and the Fed has “inflated” its balance sheet because of the values it bought during the 2008 crisis as a way to stimulate the economy.
“We should not lose sight of where we are now. There was an excessive monetary slack,” he said, adding that even if he did not keep his promises, it would still be necessary to raise rates.
Members of the Fed agree with that and point out that although they increase, they will still remain low and will gradually tend to return to normal.