Emerging Markets / December 28, 2018

Interest Rates and Economic Outlook into 2019

During December 18 & 19, the Federal Reserve’s Federal Open Market Committee (FOMC) held its eighth and last meeting of 2018. With the mandates of maximizing labor participation (i.e. low unemployment), maintaining inflation stability (ideally at 2.0%), and keeping the economy moving forward, the FOMC regularly considers the macroeconomic situation of the country in order to formulate and implement national monetary policy.

Interest Rates and Economic Outlook into 2019

After the two-day gathering, Federal Reserve Chair Jerome Powell announced that the FOMC had decided to raise the target for the Federal Funds rate that it had set in September by 0.25%. This means that the Federal Funds rate now has a target range between 2.25% and 2.5%. However, the decision to raise the Federal Reserve’s baseline interest rate for a fourth time this year has sparked some controversy. As the Federal Reserve sets interest rates increasingly higher and closer to the long-term average, detractors argue that the US Central Bank is hindering economic growth and dynamism. Meanwhile, the FOMC and those who defend its current policy course maintain that rates need to increase in order to keep the economy from overheating. Likewise, it is important to remember that currently the interest rate is at its highest levels since the 2008 financial crisis. Therefore, this scenario gives the Federal Reserve an opportunity to gain leverage through its monetary policy tools in case of an eventual economic slowdown. By raising interest rates now and maintain them closer to a sustainable long-term average, the FOMC avoids the risk of a liquidity trap in which it would be unable to stimulate the economy by decreasing interest rates.

Even though the national economy of the United States has continued on a path of growth recovery and dynamism, there will be a divided government as of January 2019, which makes the economic outlook more uncertain. In its official statement, the FOMC highlighted continued jobs gains and a steady low unemployment level as well as an increase in household spending and steady levels of business investment. Likewise, after remaining inconsistent and below target for years in the past, overall inflation has stabilized around its 2.0% long-term target, which is one of the policy mandates of the Federal Reserve.

In the case of the stock market, the Dow Jones Industrial Average (DJIA) has experienced a rollercoaster in recent weeks, going from 20.660 points on March 22, 2017 and 22.350 points on September 22, 2017 to 24.889 points on December 7, 2018 and 23.134 on December 27, 2018. Overall, the economy of the United States is expected to grow by approximately 3.0% during 2018 and above 2.0% in 2019. Similarly, unemployment is expected to remain below 4.0% through 2021. Furthermore, if this positive economic trend continues, the FOMC estimates that the Federal Funds interest rate will reach 3.0% by the end of 2019, and surpass 3.0% by the end of 2020.

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