The US Federal Reserve decided to keep its benchmark rate in a range between 1.0 and 1.25 per cent in September 2017. At the same time, the Fed announced that it will start shrinking its $4.5 trillion balance sheet in October. With the interest rate outlook remaining unchanged, another rate hike is likely to happen this year. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the Centre for European Economic Research (ZEW) in Mannheim, comments on the Fed's latest decision.

“The determination of the Fed to bring monetary policy back to normal is to be welcomed. The fact that the Fed’s plans to shrink its balance sheet have been made concrete now lowers the risk of Donald Trump being able to finance his planned tax cuts by printing money. Despite the inflation rates of the United States (1.9 per cent in August 2017) and the Eurozone (1.5 per cent) being fairly similar, the reactions by the Fed and the European Central Bank (ECB) are entirely different. While the Fed is taking action, the ECB keeps stalling its decision to put an end to its bond purchases. In terms of monetary policy, the contrast between the US and the Eurozone has been further accentuated by today’s Fed decision. This has further increased the pressure on the ECB Governing Council to take action in October.”

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