On 15th December, the US Federal Reserve (Fed) raised its key short term interest rate by 0.25%, to a range between 0.5% and 0.75%. It had made the same increase 12 months previously. When the Christmas 2015 rate rise occurred, the central bank set a target of raising rates a further four times during 2016. However, wobbles in China and the uncertainties caused by the Brexit vote put paid to that plan.
Last month, when the Fed repeated its end-of-year increase, it set the target rate at 1.25%-1.50% by the end of 2017 – the same range it had originally struck for the end of 2016. A trio of rate rises would represent a dramatic acceleration in activity by the Fed – December’s rate rise was only the second in the last ten years.
Whether the Fed’s predictions prove any more accurate this year remains to be seen. One problem the bank faces in looking at 2017 is the economic impact of President Trump’s actions, as opposed to candidate Trump’s campaign rhetoric. If he succeeds in giving the US economy a boost through tax-cutting measures, the Fed is likely to counter this by raising rates steadily, as unemployment is already at low levels.
On this side of the Atlantic the Bank of England will probably not raise rates in 2017. The uncertainties surrounding Brexit will play on their minds, even though inflation is on the rise – the November 2016 the CPI annual rate of 1.2% was 1.1% higher than 12 months’ previous.
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