US rate rise signals confidence in economy

The US Federal Reserve has raised its benchmark interest rate for the third time in a row. It’s also the second increase since the November 2016 election of President Trump.

The decision to increase the rate by 25 basis points from 1% to 1.25% is understood to indicate growing confidence in the strength of the American economy, and its ability to handle tighter financial conditions.

According to US Federal Reserve Chair, Janet Yellen:

“The economy is doing well, is showing resilience. We have a very strong labor market, an unemployment rate that’s declined to levels we have not seen since 2001. And even with some moderation in the pace of job growth, we have a labor market that continues to strengthen.”

Further increases to the US benchmark interest rate are also being forecast for later in the year. 

This increase was widely forecast by industry commentators, with the assumption of an increase contributing to the RBA’s recent decision to leave Australia’s own cash rate on hold once again in June 2017.  

It was previously forecast that increases to the US benchmark interest rate could indirectly impact Australia’s home loans and wider economy. If the US Fed’s decisions make it more difficult for Australian lenders to source overseas funding, this could contribute to these lenders deciding to increase their own interest rates to compensate.

Other contributing factors behind the recent out-of-of cycle interest rate rise by Australian lenders include increased pressure from APRA, especially surrounding investor loans and interest-only mortgages.  

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