International macroeconomic conditions evolved substantially during 2016 and will continue to do so during 2017, given the important political and market condition changes that are currently underway. Some of these dynamics include efforts from the Organization of Petroleum Exporting Countries (OPEC) and other oil producing nations to strengthen their income by raising international market prices as well as ongoing elections throughout Europe. This article analyzes global macroeconomic conditions with a special look into the ongoing dynamics in the United States.
Macroeconomic Indicators in the United States
Under an ideal scenario, the US Federal Reserve has a long-run target for inflation of 2.0%, while its long-run target for the federal funds interest rate is of 3.0%, representing a baseline of 1.0% real annual growth on regular savings. Following last week’s Federal Open Market Committee (FOMC) meeting (March 14 & 15), Chairwoman Janet Yellen announced the Federal Reserve’s decision to raise the federal funds interest rate to a target range between 0.75% and 1.0%. This raise comes with the expectation that the 2017 calendar year will bring about at least one more interest rate hike during the coming months, which stands in contrast with 2015 and 2016 when interest rates were only raised once a year. Furthermore, recent projections by the Federal Reserve, expect the US gross domestic product (GDP) to grow by 2.1% during 2017 and 2018 respectively, in inflation adjusted (real) terms.
The long awaited interest rate raise announced last week comes after a positive jobs-creation report for the early months of 2017, with an estimate of 200.000 new jobs added monthly, during the last three months. Similarly, the FOMC based its decision on the overall positive consumer sentiment currently felt throughout the US, which has led to a moderate increase in household spending during the last several weeks. Simultaneously, business investment has somewhat strengthened during the first months of 2017 based on the expectation that the new Republican administration will manage to foster a more favorable investment environment.
A combination of these factors has led to a low unemployment rate of 4.7% for the past month of February, where the rate is expected to stabilize during the coming years. However, the national labor force participation rate has not changed substantially throughout the last year. In terms of inflation, the rate rose above 2.0% between December 2016 and February 2017, which surpasses the Federal Reserve’s stated inflation target of 2.0%. This significant rise in inflation, from an average of 1.0% during 2016, is mainly due to the increase in fossil fuels and overall energy prices worldwide. Nevertheless, inflation levels remain prone to volatility given that the 2016 OPEC Vienna Agreement on petroleum output reduction is set to expire this summer and international market prices are already showing a downward trend. Meanwhile, the core inflation rate, which does not take into account changes in food and energy prices, has remained stable at 1.75%. Ultimately, the Federal Reserve expects inflation to stabilize around its 2.0% long-run target during the coming year.