Fri June 16, 2017

The Federal Reserve’s Federal Open Market Committee (FOMC) raised interest rates by 25 basis points this week, from one to 1.25 percent.

What implications could this have on the plastics industry? Plastics Industry Association (PLASTICS) Chief Economist Perc Pineda offers his thoughts.

The FOMC’s decision to raise the Fed funds interest rate by 25 points is justified given that the U.S. economy continues to improve. The move to raise rates is consistent with the two objectives of the Federal Reserve: maximum employment and two-percent inflation. Weak retail sales and lower inflation data in May released today are expected to be short-lived.

The rate hike was moderate, taking the Fed funds target rate from one to 1.25 percent, which will not drastically raise borrowing costs. Hence the rate hike will not have an adverse impact on markets like automotive, housing and durable goods that are sensitive to interest rate changes. By extension, the FOMC’s action will not have an adverse effect on the plastics industry in the near- to medium term.

If we look at the Fed funds rate projections of the FOMC members for this year and the next, they will settle at 1.4 percent and 2.1 percent, respectively. There will be additional rate hikes this year and the next, assuming that economic growth stays in an upward trajectory. However, future rate hikes will most likely remain moderate—in sync with the expected pace of economic expansion.