Fed raises interest rates, signals 2 more hikes in 2018

Fed raises interest rates, signals 2 more hikes in 2018

Fed raises interest rates, signals 2 more hikes in 2018

“Jay Powell is nearly certain to announce a rate hike today of 25bp, taking the Fed Funds target rate from its current 1.25 per cent to 1.5 per cent up to a new range of 1.5 per cent to 1.75 per cent. Markets will not respond to the hike per se, since it has been widely anticipated.

In a statement issued after a 2-day meeting headed by new Chair Jerome Powell that ended on Wednesday, Fed officials said they voted unanimously to raise the federal funds rate to between 1.5 and 1.75 percent, effective on March 22nd.

The Fed also raised the estimated longer-term "neutral" rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought. Some now envision an annual growth rate of just 1.7 percent for the quarter. But the new economic forecast, which includes a median projection for the path of future increases, made no change to the December projection for three hikes this year. "But, this now being the sixth interest rate hike, the cumulative effect since December 2015 is that a $30,000 home equity line now carries a minimum payment that is $37 a month higher", McBride said. In addition, the already historically low unemployment is seen falling even further, ending next year at a stunning 3.6 percent, according to the quarterly Summary of Economic Projections. By a slim margin, officials said they expect an additional rate increase to come in 2019, for a total of three increases that year.

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Powell noted the likely growth boost from the massive tax cuts the US Congress passed in December, and said there are aspects of the package that could help raise the potential growth rate.

The Fed indicated it will make three rate hikes this year. However, it disappointed currency traders who had bet it was prepared to raise rates perhaps four times this year as the jobs market approaches full employment. "But with the United States output gap closing, and fiscal policy ramping up, it's a matter of time before he will need to make tougher decisions that really might upset his boss", Nash said.

"The Federal Open Markets Committee said in a statement that the move was justified by encouraging economic indicators including strong job gains and low unemployment". In January, officials described both economic activity and job growth as "solid", which is a less bullish term in Fed parlance. The unemployment rate remained at a 17-year low of 4.1 per cent.

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Policy makers also maintained their inflation outlook of 1.9%, slightly below the Fed's target.

Benchmark 10-year notes last fell 5/32 in price to yield 2.8996 percent, from 2.881 percent late on Tuesday.

That message has been echoed by Powell's colleagues on the Fed board. The Fed expects inflation, which has run below its 2 percent target for six years, to stay at 1.9 percent this year and then rise to 2 percent in 2019.

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Mark Nash, the head of fixed income at Old Mutual Global Investors said: "A relaxed Fed will support easy financial conditions, risk appetite and may hurt the U.S. dollar in the near term".

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