Rising interest rates in the US show the world economy is improving fast

Rising interest rates US Federal Reserve Jerome Powell world economy
The US Federal Reserve raises rates for the second time this year, with hints that two further increases are to come.

The rise in US official interest rates might have been widely expected but it points to a continued improvement in the US and world economy.

Federal Reserve Chairman Jerome Powell has also signalled that there will be two more rate hikes this year – taking the total to four and increasing borrowing costs for credit cards, car financing, mortgages and personal loans, but encouraging savers with higher rates on their deposits.

The Federal Open Market Committee voted to lift the target range by 25 basis points to between 1.75 per cent and 2 per cent.

Seven rate hike since the depths of the GFC

It was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from almost zero after slashing rates to deal with the global financial crisis.

Fed chairman Jerome Powell is a lawyer rather than an economist and his announcement also heralded an interesting shift in the language of the Fed from economic theories to more decisive and pragmatic policy decisions.

US economic outlook continues to improve

It also marginally improved the outlook for the US economy, with a faster pick-up in inflation, continuing low unemployment and higher economic growth.

In an important move towards greater transparency, Mr Powell also said that press briefings will be held after every policy meeting instead of quarterly from January 2019, allowing the Fed to be more spontaneous in cutting or raising rates as economic conditions warrant.

As always, the Fed is still walking a bit of a tightrope, even as the US economy continues to improve.

If it raises rates too fast, it will risk reducing the buying power of borrowers with tight household budgets as they cope with higher debt repayments.

If it raises rates too slowly, then the Fed could end up scrambling to slow down an economy that is overheating as inflation and economic growth rise too far and fast.

What the Fed announcement did show though was that Powell will be less concerned about using the right economic theory and more pragmatic about responding to what is actually happening on the ground.