The Federal Reserve’s decision to raise interest rates this week sparked fears of a “lost decade” for the economy.
But now, a new study suggests the country may actually have a shot at a rebound.
The US economy has been battered by the global financial crisis and is facing a slowdown in the US.
But the Federal Reserve is expecting growth to be strong enough to allow the US to return to growth before the next recession, a scenario that could boost the economy by a third.
“There is an argument that the Fed should have increased its benchmark interest rate by a quarter to two per cent before the crisis, and maybe even sooner, but it did not,” said Paul Ashworth, chief economist at the Australian National University.
“The Fed is going to have to be a bit more flexible than it has been at the moment.”
The new paper, by economists at the University of California, Irvine and the Bank of England, argues the US could experience a resurgence in GDP in the third quarter of 2021, after a slower growth than expected in the first quarter.
The Fed’s decision last week to raise rates from 0.75 per cent to 1.25 per cent is likely to boost the US stock market.
The index of US shares rose more than 8 per cent in the second quarter, compared to a 0.6 per cent gain in the final three months of last year.
The Bank of Britain and the US Federal Reserve have also raised their key interest rate in recent weeks.
Economists believe the Federal Housing Finance Agency is expected to raise mortgage rates this year.
Federal Reserve Governor Jerome Powell has already raised rates twice this year, while the Bank has also cut rates in the past two months.
Mr Ashworth said there was a “lack of clarity” about the timing of the US recovery.
“But it’s not too late,” he said.
“We should see it at some point, but we don’t know what that is yet.”
The authors of the paper argue that the Federal Open Market Committee should increase its key interest rates from 1 per cent now to 1 per.5 per cent by 2021.
They also suggest the Fed may raise rates a further 1 per of 1 per for each quarter up to 2021.
The authors argue the Fed is unlikely to lower its key rate further because it is unlikely the economy will be as strong as expected in 2020.
The latest figures released by the US National Economic Council (NEC) showed that the US grew by 2.9 per cent during the third month of the year, the slowest rate of growth since the start of the recession.
“If you look at the broader US economy, the Fed has probably cut rates enough that you would think that the economy is going into a recovery,” Mr Ashburn said.
The Federal Open to Business Coalition, which represents the nation’s leading business groups, said the report “underlines that the Trump Administration is not doing enough to rein in the Fed’s aggressive monetary policy”.
“It’s important that the Administration continue to keep the Fed engaged in the policymaking process, but the reality is that it is clear that the rate hikes are coming at the wrong time,” the group said in a statement.
Federal Open-Rate Study A new paper published by the Federal Finance Council, a non-partisan think-tank, suggests the Fed will cut its key rates from the current level of 1.75 to 1% by 2021, and increase its benchmark rate by 1.5 to 2.25 percent by 2021 and 2.5 percent in 2024.
It says the Federal government should also increase the payroll tax to help boost the labour market.
“At this point, it is still unclear how much of the economic recovery will be sustained in the coming year, but at least we can now see the Fed increasing its key lending rate,” the study said.
A new report published by a group of academic economists has found that the “Trump Effect” could boost US growth by a 3.2 per cent return in 2021, the best possible outcome for the US economic recovery.
The researchers estimate that a Trump-inspired rally in the stock market could see the US gross domestic product (GDP) rise by 3.3 per cent, or $1.2 trillion.
The economists also believe the US should be able to recover at a 2 per cent growth rate in 2021 and 3 per cent rate in 2024, as long as the US does not suffer an economic contraction in the years ahead.