Federal Reserve Appears Bullish, While Rest of World Awaits Its Next Move

Author: Anita Pennathur

Release Date: Jun 14, 2017

MEDIA CONTACT: Jim Hellegaard
561-319-2233, jhellegaard@fau.edu

Despite holding interest rates unchanged in their May meeting, the Federal Open Market Committee (FOMC) seems bullish and unfazed with the reports of weakness in the growth in economic activity. 

The FOMC issued a strong statement signaling it believes the slowdown in growth is transitory and pointed to solid job gains in the labor market. Its decision leaves the federal funds rate unchanged at .75 to 1.00 percent. However, the hawkish Fed comment that despite the slowdown in consumption spending, the “fundamentals underpinning the continued growth of consumption remained solid” demonstrates their commitment to gradual, yet steady rate hikes. 

This is in sharp contrast to more cautious FOMC statements in recent years.

GDP growth slowed down to 0.7 percent in the first quarter of 2017, as compared to the growth of 2.1 percent and 3.5 percent in Quarters 1 and 2 of 2016. Consumer spending slowed down to the slowest pace since 2009, and grew a meager 0.3 percent, down from the 3.5 percent growth in the last quarter of 2016. However, many economists believe that these figures don’t provide the full picture and point to several indicators that underscore the strength and robustness of the U.S. economy. Fixed business investment increased by 10.4 percent, and wages in the first quarter grew the most in a decade. Household confidence and optimism are also at multi-year highs as a result of the stock market gains and increase in home values and sales. 

Where does this leave the U.S. economy? After bottoming out in 2009, the Dow Jones Industrial Average is now hovering around 21,000, and while the European Central Bank’s key interest rates remain near zero or in negative territory, Fed observers predict a 99 percent probability of a rate hike when the FOMC reconvenes June 13-14. 

It seems like the crisis is in the past for the U.S., although the rest of the world may not see the same glad tidings.

Anita Pennathur is a professor of finance and Stone Fellow at Florida Atlantic University’s College of Business. The opinions expressed in this article are those of the author and do not reflect or represent the opinions of Florida Atlantic University.