Thursday, 15 November, 2018

Fed Raises Interest Rates, Signals Faster Hikes on the Way

Federal Reserve expected to hike rates as Sterling slips Federal Reserve raises interest rates
Kelvin Reese | 15 June, 2018, 02:01

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 per cent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signalled it would tolerate above-target inflation at least through 2020. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 per cent objective over the medium term.

The Fed also signaled that it will raise rates more this year than previously expected - four times rather than three.

Federal Reserve Chairman Jerome Powell speaks at a news conference following the Federal Open Market Committee meetings in Washington, U.S., March 21, 2018.

Second, the lower unemployment over the past couple of months has been accompanied by a drop in the labor force participation rate for 25-54 year olds - the prime working-age group unaffected by the aging of the United States population. That could spark higher inflation.

The change will start in January following the meetings that are scheduled roughly once every six weeks, to give the Fed "more opportunities to explain our actions", Mr Powell told reporters.

The Fed watches price measures closely to determine how fast to raise interest rates but has signaled that the two percent target is not a ceiling and that it would be comfortable with inflation rising slightly above that level for a time. Headline inflation projections stayed at 2.1 percent for 2019 and 2020.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000. So the median forecast has now edged up from 4 rate hikes from 3 earlier.

The new interest rate guidance shows the Fed will continue to raise short-term rates after reaching a level Fed officials call neutral level, which is where rates neither stimulate nor slow the economy.

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The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.

Boeing and Caterpillar, two blue-chip companies with significant operations in China, both lost around two per cent.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish.

"Is it on a cyclical basis lower as the economy gets hotter and hotter?"

In a technical move, the central bank also made a decision to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

That is a welcome step-up from the roughly 2-percent growth averaged throughout the recovery, which was plagued by a series of crises overseas and uncertainties at home, delaying the Fed's tightening plans.

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