NEWS ALERT: The Fed Raises Interest Rates, Impact on Trade

Abdur Chowdhury, Ph.D. Research Consulting Economist
March 15, 2017

As expected, the Federal Open Market Committee (FOMC) announced an increase in the federal funds target rate of 0.25 percentage points to a range between 0.75 to 1 percent. The Committee’s assessment of the economic outlook noted ongoing progress toward the Fed’s dual mandate. The unemployment remained little changed and inflation moved “close to the Committee’s 2 percent longer run objective.”

The FOMC dots – members’ expectations for future policy rates – showed a coalescing in the opinion of Fed members around expectations for three interest rate hikes in 2017 and 2018. With continued progress toward the dual mandate, there is good reason to expect rates to continue to rise this year. However, there are considerable risks on both the upside and downside. On the upside, a more expansionary fiscal policy would likely cause the Fed to move faster than currently anticipated. On the downside, financial instability or heightened global and/or domestic political uncertainty could put a lid on current economic progress.

Since the European Central Bank and the Bank of Japan are in no position to raise rates, today’s action by the Federal Reserve will lead to an increase in the dollar’s exchange value. This will promote financial capital outflows from Europe and Japan. China is in a more difficult situation since a stronger dollar would increase bilateral trade imbalances and encourage further capital outflows.

Effective Fed Funds Rate

Source: St. Louis Federal Reserve