Money

Fed boosts interest rate, predicts two more hikes this year

March 24, 2018 10:39·
US stocks, dollar fall as Fed lifts interest rates

US stocks, dollar fall as Fed lifts interest rates

The action was approved, 8-0, avoiding any dissents at the first meeting that Powell has presided over as chairman since succeeding Janet Yellen last month. Virtually every USA recession is preceded by a runup in interest rates. The Fed tightened policy three times a year ago.

"While there were some aspects of today's announcement that were perhaps more hawkish than some expected, ultimately the currency market appeared to focus on the unchanged projection of a total of three rate hikes for 2018, which perhaps disappointed some who expected policymakers to signal a more aggressive near-term rate path", said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities.

Since then, the FOMC has agreed on a plan to gradually unwind its asset purchases, in one of Yellen's last decisions as central bank chair.

However, he also acknowledged that central bankers now consider the prospects of a global trade war as a "more prominent risk" to the economic outlook.

In December, the Fed predicted United States gross domestic product (GDP) to grow 2.5 percent this year, 2.1 percent in 2019 and two percent in 2020.

The short-term bias is turning bearish for the dollar index.

Shares on China's exchanges were lower, with the Shanghai Composite Index slipping as much as 1.2 percent to two-week lows.

Paradoxically, Powell's latest attempt to soft-pedal the Fed's projections comes just as they're coming more in line with those of some Wall Street economists. But even the typically sanguine Fed is predicting that the USA economy will not reach the Trump Administration's 3% target, this year or during the remainder of the president's term. The committee pushed the 2020 level up from 2 percent to 2.1 percent for both core and headline.

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"Many investors would have expected that the Fed would have upgraded its view given the stronger growth, the lower expected unemployment rate and improved economic outlook", he noted.

"He definitely downplayed the dots", said Michael Feroli, chief USA economist for JPMorgan Chase & Co.in NY, referring to the constellation of rate forecasts that the central bank portrays as dots on a graph. Recent data suggest that economic growth is falling short of expectations for the first quarter.

On the economic front, the Australian Bureau of Statistics said that the jobless rate in Australia came in at a seasonally adjusted 5.6 percent in February.

The Fed's goal is to keep supply and demand in balance in the economy amid a tight labour market, without lifting borrowing costs so quickly that the economy stalls. More broadly, 2018's growth projection rose 20 basis points to 2.7% and the FOMC took many opportunities to tighten at the margin.

The yield on two-year USA notes slipped back to 2.304 percent from a 9-1/2-year high of 2.366 percent hit on Wednesday while the 10-year yield dipped to 2.874 percent after an initial spike to 2.936 percent. Along with raising their growth forecasts, they declared in a statement that "economic activity has been rising at a moderate rate" and that "job gains have been strong in recent months".

They now expect the jobless rate to decline to 3.6 percent from the current 4.1 percent, and stay there through the end of 2020.

"With the unemployment rate now firmly below its long-run equilibrium, the implication is that the Federal Reserve (Fed) needs to normalise rates at a gradual and regular pace". The Fed had been gradually reducing its estimate of the long-run neutral fed funds rate since it began publishing its calculations in January 2012.

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