nsucurrent.com April 26, 2018

Rising risks - on Fed rate hike

24 March 2018, 01:42 | Ruby West

US Fed goes for 25bps rate hike in Jerome Powell's first meeting as chair


Powell was appointed in October to replace former chair Janet Yellen.

In the forecasts, Fed officials projected a median federal funds rate of 2.9% by the end of 2019, implying three rate hikes next year, compared with two moves seen in the last round of forecasts in December.

That likely caused Fed officials to signal they expect a slightly more aggressive path for rate increases next year.

"A number of participants of the FOMC [the Fed board] did bring up the issue of tariffs", Powell said, adding that the Fed is hearing from many business leaders that "trade policy has become a concern going forward". Further, a minimum of two more fiscal policy changes are slated to come prior to the end of the calendar year, per representatives of the Federal Reserve Bank.

In a statement ending its latest policy meeting, the Fed boosted its key short-term rate Wednesday by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent. "History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride".

Wall Street stocks finished a volatile session modestly lower on Wednesday after the Federal Reserve lifted interest rates and pointed to a stronger USA growth outlook following tax cuts.

The Fed raised its key rate by 25 basis points to 1.75 percent on Wednesday and flagged at least two more increases were likely this year. The reason for this widely expected rate hike is historically low unemployment rate in the USA and the confidence in the growth of the U.S. economy, which is picking up strongly.

In addition, the already historically low unemployment rate is seen falling even further, ending next year at a stunning 3.6%, according to the quarterly Summary of Economic Projections.

Higher interest rates in the United States are usually followed by an outflow of foreign funds from upcoming economies such as India, which are considered to be 'risky'. At the same time, the case for higher rates is pretty strong as well.

It was the dollar's third decline in four sessions and helped Britain's pound to a six-week high before a Bank of England meeting expected to lay the foundations for another United Kingdom rate increase in coming months.

Two-year USA yields slipped to 2.304 percent from 9 1/2-year high of 2.366 percent.

A portion of the voting membership of the committee rotates every year among the Fed's regional bank presidents.

Economic conditions have also shifted.

There have been positive technical signs including rebounds in the prices of big-cap stocks in the energy and petrochemical groups, as well as for mid-cap stocks, following rises in the SET Index, he said.

Equity markets were down worldwide, with the 1 percent increase in Japan's Nikkei the only positive among major indexes for the day.

The statement also declared, in a change from January, that "the economic outlook has strengthened in recent months". By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion, he said. By definition, slower growth will mean fewer new jobs and diminished wage growth.

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