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Federal Reserve Worries on US Economy Running ‘Too Strong’

The officials of the Federal Reserve are worrying that the US economy is running too strong. Moreover, Fed officials believe that it could lead to major problems. This was according to the minutes of the recent meeting of the central bank.

According to the summary of the meeting released on Thursday, some members expressed “concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.”

Most of the central bank officials believe that there should be a continuous concern in raising interest rates regularly.

“Fed business contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity. Capital spending had been scaled back or postponed as a result of uncertainty over trade policy,” Fed officials said.

Federal Reserve believes running strong US economy may lead to downturn
Fed believes that US economy running too strong could lead to a downturn

In spite of this, the Federal Open Market Committee policymaking approved the quarter-point hike to the overnight borrowing hike. The funds’ rate moved to a 1.75% to 2% range.

This move arrived despite the likely growth of the economy to 4%. This is also whilst the high customer and business sentiment levels as well as surging investment levels.

The minutes stated that the economic growth is “progressing smoothly” with activity “expanding at a solid rate.” Moreover, this is along with the continued strength of the labor market conditions.

Most Fed participants thought that hike was appropriate.

Fed also removed “forward guidance,” a long-standing clause. This is because the fund rate would remain “below levels that are expected to prevail in the longer run.”

“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes stated.

Federal Reserve believes running a strong US economy may lead to a downturn

On Thursday, the Federal Reserve said that running the US economy too strong may increase pressure on inflation. Further, the Fed believes that this could lead to a downturn.

“A prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn,” according to the minutes from the central bank’s meeting.

Washington’s recent changes in trade policy have brought the potential US-China trade war. This could also hurt the US economy’s growth as forced payment to higher duties of importers may happen.

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