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The Federal Reserve has been more aggressive in 2018. Will that change?

The Federal Reserve has been more aggressive in 2018, increasing interest rates twice and predicting it will raise rates twice more this year and three times in 2019.

What would cause the Fed to continue along its current path of rate hikes? Higher inflation. For the first time in six years, the Feds preferred measure of inflation, the PCE inflation rate, hit 2% (see chart). The Fed has stated publically that a 2% inflation rate is its target. Accordingly, if inflation continues to go higher than 2%, the Fed will feel significant pressure to stick to its current plan of rate hikes. While many economists predict that the Fed will allow inflation to go up to about 2.5%, higher inflation than that could cause the Fed to become more aggressive, as higher interest rates help keep inflation down.

What could cause the Fed to slow down rate hikes? Two recent developments stand out. The first is global trade tensions. In June, Fed Chairman Powell acknowledged that trade policy could change the Feds economic outlook, though he emphasized the Fed has not yet seen any impact from trade issues in economic data. The second is pressure from the White House, which would like to see rates stay low to encourage economic growth.


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