David Fuller's view -
The US Federal Reserve has signalled that it will step up the pace of interest rate rises next year as a robust jobs market and stronger growth prompted the central bank to raise rates for only the second time in a decade.
Janet Yellen, the Fed’s chairman, described the increase as a “vote of confidence in the economy”, as officials unanimously opted to raise its Federal funds target range to between 0.5pc and 0.75pc, from 0.25pc to 0.5pc.
Ms Yellen said expectations of fiscal stimulus following Donald Trump’s US presidential victory had been one of “several” factors influencing changes to the Fed’s projections, as policymakers indicated three more hikes next year.
“Job gains have been solid in recent months and the unemployment rate has declined”, Fed officials said in a statement. Economic activity was expanding at a “moderate pace” while some measures of inflation expectations had increased “considerably”.
The dollar jumped against the euro and pound and US Treasury yields climbed after policymakers upgraded their growth and interest rate forecasts and projected a further fall in the unemployment rate. The Dow Jones Industrial Average came within 40 points of a record high of 20,000 shortly after the interest rate decision , though the index closed down 0.6pc at 19,792.53.
The world’s biggest economy is now expected to grow by 2.1pc in 2017 and by 2pc in 2018, compared with previous forecasts in September for growth of 2pc per year. The Fed’s growth projection for 2019 was also revised up, to 1.9pc from 1.8pc. Unemployment, which fell to a nine-year low of 4.6pc in October, is now predicted to drop to 4.5pc next year, where it is expected to remain for the next three years.
The Federal Open Market Committee (FOMC), which sets interest rates, signalled that they could rise to around 1.4pc by the end of 2017, suggesting three further increases of 0.25 percentage points over the coming year if the economic outlook evolves as anticipated. Its so-called “dot plot”, where policymakers indicate their expectations for the likely rate path over the medium term, showed policymakers predicting rates will rise to around 2.9pc by the end of 2019 .
I am glad to say that Fuller Treacy Money never took the overly gloomy groupthink view that the world would remain stuck for many more years in a disinflationary or deflationary environment of minimal GDP growth, with negligible inflation and record low interest rates.
Instead, focussing on the world’s largest economy, I forecast back in 2009 and many times thereafter, that the severe credit crisis recession would require at least 5 to 7 years of convalescence, and possibly somewhat longer before recovering. Today, it is just under 8 years since the US economy bottomed.
This was not a lucky guess on my part. Instead, it was based on the average of what we saw following other credit crisis recessions over the last 100 or more years.
The key factors behind this lengthy convalescence were deleveraging by both corporations and consumers, which considerably lowered government tax revenues. Extreme caution followed. The result was an economy in stall, as were so many others around the globe, with the central bank providing the main stimulus.
Following nearly eight years of minimal GDP growth, I think the US economy is now showing clear signs of recovery, led by consumer spending. This is greeted with considerable relief but confidence is still low, not least among forecasters. The Fed’s forecasts for GDP growth over the next two years are 2.1% in 2017 and 2% in 2018. That is very conservative and could be correct, depending on circumstances, although we can only guess. However, my view is that surprises will be on the upside, for GDP growth, inflation and interest rates.
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