Kristian Rouz — The US central bank is widely expected to undertake yet another hike in its base borrowing costs during its ongoing policy meeting on 25-26 September. Economists believe solid macroeconomic fundamentals would be behind the decision, as US unemployment is near its record low, whilst a solid pace of hiring and modest wage inflation would support the move.
The decision to hike rates would end the era of accommodative monetary policies, which started in the aftermath of the financial meltdown of 2007-2009. The rates would go up to the gauge of 2.00-2.25 percent, supporting domestic investment and savings-focused financial strategies.
"Financial markets should prepare for a more hawkish tone," Joseph Lavorgna and Thomas Julien of French investment bank Natixis wrote in a note. "Another quarter of 4-percent real GDP growth coupled with faster wage gains will likely cause policymakers to err on the side of aggressiveness at some point."
US wages have grown roughly 5 percent over the past 12 months, but unequal distribution of this growth — with booming salaries in the oil sector and stagnant wages in the services — has produced little effect to consumer confidence.
"In light of the economy's impressive growth momentum, the upward trends in wage and price inflation, and the limited overall tightening in financial conditions achieved so far, on net we think the risks to the funds rate are tilted to the upside," a team of Goldman Sachs analysts led by Jan Hatzius said in a report.
Indeed, despite the higher central bank rates, many commercial banks have abstained from increasing consumer borrowing costs. This comes as household debt has expanded beyond the stunning $13 trln and the majority of heavily-indebted consumers would struggle to refinance or take new loans at higher rates.
In this light, commercial bank profits have squeezed in the retail segment, but overall, US financials are doing well for themselves due to the tax cuts enacted last December. Business investment and borrowing have increased as well, rendering the current economic environment even more favorable for the private sector.
Economists also expect the Fed to reaffirm its commitment to the gradual pace of rate hikes, as the US economy is still in the process of adjustment to the changing landscape of international trade.
"I don't think the Fed is going to come out and sound like they're on the war path to raising rates," Mark Cabana of Bank of America Merrill Lynch said. "I think they're going to sound more measured: 'the data has been strong, and we're more confident in our forecast'."
A significant increase in borrowing costs could hurt American farmers, who have been reliant on the cheap credit and government subsidies of the past decade. The Fed's mandate is now to encourage a sustainable mid-to-long-term rise in domestic investment — which would spur growth in industries that could absorb the output of export-oriented producers.
"We don't see it in the numbers yet, but we've heard a rising chorus of concern" related to the elevated trade tensions, Fed Chairman Jerome Powell said back in July. By now, the central bank has already evaluated the first effects of the trade rift and the FOMC is expected to weigh in on the matter.
This suggests the Fed would also raise rates in December, to 2.25-2.50 percent.
"Something pretty significant would have to happen for the Fed not to hike in December," Tom Essaye of The Sevens Report said.