Fed raises rates to highest level in 10 years

07 April, 2018, 00:41 | Author: Barbara Daniel
  • Fed raises rates to highest level in 10 years

The FOMC forecast that it will raise the benchmark interest rate three times in 2019, up from two, as previously estimated.

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

In its latest projections, the Fed Wednesday boosted its outlook for economic growth this year, lowered its forecast for unemployment slightly and kept its inflation projection unchanged.

As had been widely predicted, the Federal Reserve made a decision to increase its interest rate by 0.25% during its March meeting. "The closing of that 1.5% gap could move yields a lot more than inflation rising from 1.7% today to the Fed's target of 2%, or to their current forecast of 2.1%".

It was the first rate hike under new Fed Chairman Jerome Powell. But Janet Yellen, the former Fed chairman, is not sitting in the big seat anymore.

The revisions will have an effect on the Fed's path of gradual normalization of monetary policy, including the number of envisaged interest rate hikes.

The Fed expects that the job market will remain strong. This marks an increase from the 2.1% GDP growth forecast for 2018 by officials in September 2017. They raised their estimate for growth in 2019 to 2.4 percent, up from 2.1 percent. Unemployment is now anticipated to fall to 3.8 percent this year and 3.6 percent in 2019, which would be the lowest level since 1969. According to Freddie Mac, the average 30-year, fixed mortgage rate last week was 4.44 percent-a dip from the prior week, but nonetheless on a tear.

Officials' growing optimism tracks with the expectations of many Wall Street analysts.

USA 10-year Treasury yields climbed to hit a one-month high while the dollar dropped against a basket of major currencies.

In his news conference, Powell left the door open to more or fewer than three increases this year, depending on economic conditions. He said there's no reason to believe that's going to change soon. "It could change up".

It also voted to increase the primary credit rate to 2¼ percent.

Elsewhere, the Canadian dollar and Mexican peso gained after reports that the USA government administration had dropped a demand related to vehicle exports, removing a barrier to a deal for a new North American Free Trade Agreement.

More so given recent reports that Trump would announce an increase in tariffs on Chinese imports this week and that China is already considering slapping higher tariffs on USA agricultural exports. The Fed is set to hike two more times.

For years after the financial crisis, the Fed raised rates slowly to keep the economy humming.

The Fed said that "the economic outlook has strengthened in recent months", while the labour market has seen "strong" job gains. Market watchers are concerned that this could lead to tit-for-tat responses from other nations, and hurt global economic growth. Needless to say, without a volatile reaction, it's hard to tell if we can call the Fed hawkish or dovish, however, the central bank's language has me leaning towards the hawkish side. In January, officials said they expected inflation to increase this year. The increase represents that uplift in optimism. "The household spending and business investment have reached moderate levels against strong fourth quarter data", adds the statement. Wage growth appears to be improving, but the signs are mixed.

Moreover, with President Donald Trump's announcement of tariffs of 25% and 10% on steel and aluminium, trade war threats are looming and may further impinge on the way foreign investors allocate funds for emerging developing economies.

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