The Federal Reserve raised US interest rates again on Wednesday, the seventh increase since 2015 when the central bank resumed raising rates after the last recession.
The Fed move came after a two-day meeting where its members discussed the robust state of the US economy and the potential impact of a trade war amid rising tension between the US and its largest trading partners.
Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the US jobs market as “strong” and said economic activity had been rising at “a solid rate”.
US unemployment dropped to 3.8% in May, its lowest level since April 2000 and one of the lowest levels since the second world war. More increases are expected this year but the Fed noted “readings on financial and international developments” would factor into its decisions on future increases.
The US has now added jobs every month for 92 consecutive months and wages, which have stagnated since the recession, have begun to rise moderately.
At the same time stock markets remain close to record highs and inflation has accelerated. The labor department reported on Tuesday, just as the Fed was meeting, that the consumer price index had risen by 2.8% from a year earlier, the biggest annual gain since February 2012.
The Fed’s twin mandate is to bolster employment while controlling inflation, and in the current environment more rate rises appear inevitable. The Fed has indicated that it is likely to raise rates three or four more times this year.
Against this background, however, Fed officials are closely watching the escalating tensions between the US, Canada, China, the EU and Mexico over trade. So far stock markets have shrugged off strong rhetoric from both sides about threats of retaliatory action following the Trump administration’s decision to impose tariffs on steel and aluminium.
Last week’s G7 summit of world leaders in Canada ended in acrimony after Trump officials said Canada’s prime minister, Justin Trudeau, had “stabbed us in the back” after he told a press conference Canada would “move forward with retaliatory measures” in response to the Trump administration’s move to impose tariffs on aluminium and steel.
As early as this week the Trump administration is expected to unveil $50bn worth of tariffs on Chinese goods – a move that Beijing has also warned will be met with retaliatory action.