While the median projection for the outcome for 2018 has been revised up from the June forecast of GDP growth of 2.8 per cent to 3.1 per cent the board members have generally retained their view that the growth rate will drop back to 2.5 per cent next year, 2 per cent in 2020 and 1.8 per cent in 2021. Loading Given that the most recently quarterly GDP growth experienced in the US was 4.2 per cent, effectively they are saying that the growth rate that Trump claimed in his address to the United Nations this week made the US economy the ‘’envy of the world’’ and the ‘’fastest-growing economy in the world’’ (it isn’t) is temporary and unsustainable and is going to fall away quite sharply. There are a number of reasons why the Fed outlook is credible. The big increases in the US Government’s debt and deficits – a $US1 trillion ($1.4 trillion) deficit is expected next year as a result of the Trump tax cuts and increased spending and the US debt-to-GDP will be close to 80 per cent by the end of this year – will limit future fiscal stimulus even as the initial impact of the Trump tax cuts wanes.

The Fed’s own actions – Wednesday’s rate rise was the eighth in this cycle with another five amounting to 125 basis points in its pipeline through to 2021 – will dampen growth. Indeed, should growth continue to run at four per cent-plus it would probably raise rates more assertively. Then there are Trump’s trade wars. His tariffs, whether the administration understands it or not, are a tax on US businesses and consumers, will erode the competiveness of US companies in international markets and will inevitably do damage to the US economy. Loading Replay Replay video Play video Play video The Fed chairman, Jerome Powell, gets that, saying at the post-meeting press conference that if widespread tariffs were in place for a long time ‘’that's going to be bad for the United States economy." Ticking away in the background is the Fed’s ‘’other’’ policy mechanism.

In response to the financial crisis the Fed grew its balance sheet from about $US900 billion in 2008 to about $US4.5 trillion at its peak last year by buying US Treasury bonds and mortgage-backed securities to keep rates ultra-low and inject liquidity into the financial system. Loading Almost a year ago it started to unwind that balance sheet expansion at an accelerating rate by not reinvesting the proceeds from maturing securities. Initially, starting last October, it ’’rolled off’’ $US10 million a month of maturing securities, increasing the amount of the securities not being reinvested by $US10 million each quarter. Next month it will hit the peak level of roll-off, with $US50 billion a month not being reinvested. By the end of this year close to $US350 billion of liquidity – and buying support for US Treasury bond issues – will have been withdrawn. That will add to the upward pressure on market interest rates but, over the course of 2019, will also see $US600 billion of liquidity siphoned out of the system. It will impact, not just rates and the availability of credit in the US, but the supply of US dollars globally.

The Fed could fine-tune, or reverse, its rates strategy and/or its balance sheet strategy if the US were suffer a significant slowdown or an implosion in its financial markets - markets priced as if the Trump-inflated growth rate can be sustained indefinitely. Its history, however – and that of most central banks, to be fair – would suggest that it has struggled to achieve soft landings in the past. Monetary policies aren’t precision tools. If the Fed’s projections do play out as it envisages, there is potential for a major confrontation with Trump, who was very quick to say he wasn’t happy with the latest rise. If rates are rising and the US economy is slowing in the lead up to the next presidential election it is inevitable that Trump’s would be expressing something more than unhappiness.