On Wednesday of last week, as expected the Fed opted to raise rates for the second time this year, taking the target rate from 1.75% to 2.00%, while signalling the possibility of two more rate hikes by the end of the year. This comes on the back of strong economic fundamentals in May with economic growth “rising at a solid rate”, a stable decline in the unemployment rate along with a pick-up in household spending. Committee members indicated in the update to their quarterly economic forecast that they expected core inflation to reach the Fed's 2 per cent target by the end of the year, and now see economic growth hitting 2.8 per cent for the full year. In addition to the upward projections for GDP and inflation, committee members also cut their forecast for unemployment. They now see a 3.6 per cent rate by year's end, compared with the current 3.8 per cent, which was the full-year projection in March. Despite the added hike, officials still see the long-run funds rate at 2.9 per cent after peaking at 3.4 per cent in 2020.
While rates are on an upward trajectory (less accommodative) in the US, the situation is different for many other central bankers who are perennially stuck in an accommodative mode amidst increasingly uneven and disappointing economic activity.
Earlier in May, the Bank of Jamaica announced its decision to lower the policy interest rate by 25 basis points to 2.50 per cent. This was done to support further credit expansion and faster GDP growth. When adjusted for expected inflation, the policy rate remains negative in real terms.
