Sunday, 22 April, 2018

Fed raises interest rates in Powell's debut

Canadian dollar weekly graph US Fed raises interest rates
Jean Garcia | 22 March, 2018, 01:48

Newly-installed Fed Chairman Jerome Powell presided over his first meeting, which raised the federal funds rate to 1.5-1.75 percent. It also said it will keep shrinking its bond portfolio.

"I think we could easily go to four, because if you look at the dot plot, all they needed was one more person to up their estimate", said Dan North, the chief economist at Euler Hermes North America, referring to the chart of FOMC members' forecasts.

Speaking to Congress last month, Powell said his "personal outlook" on the economy had strengthened since December, when the Fed's policymakers collectively forecast three rate hikes for 2018, the same as in 2017. Those higher estimates may reflect the expected impact of additional government spending. The US economy grew at an annualised rate of more than 3% during some quarters a year ago, while the unemployment rate is hovering at 4.1% - the lowest since 2000.

If economic growth does pick up and the job market remains healthy, the Powell Fed is viewed as likely to accelerate its rate hikes, from the three it projected in December to four this year.

The Federal Reserve on Wednesday lifted US interest rates as expected, enthusiastic about the road ahead, saying the economic outlook had strengthened in recent months. In his first meeting as Fed Chairman, Jerome Powell chose to have his cake and eat it, too: He sounds upbeat, tough, and hawkish about next year but cautious about this year.

Unemployment appears on course to fall to rarely-seen levels that tend to come with "elevated risks of imbalances, whether in the form of high inflation in earlier decades or of financial imbalances in recent decades", Fed Governor Lael Brainard said, alluding to the dot-com and housing bubbles.

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By the end of 2019, the Fed expects its benchmark rate to hit 2.9% vs. a prior 2.7%.

But because inflation has run below the Fed's target since they formally adopted it in 2012, markets don't have a good read on how policy makers would chart interest rate policy when inflation is above the target.

USA indexes lifted following the announcement, with the Dow Jones rising as much as one per cent.

Some investors had speculated that Powell might move to impose his mark on the central bank by indicating a faster pace of rate hikes for 2018. At the December meeting, Fed officials estimated 2.5 percent economic growth this year ahead of the passage of Republican tax cuts and plans to increase government spending. Fed officials also increased their expectations for GDP growth in 2019 to 2.4% from 2.1% in December a year ago.

"Trade policy has become a concern going forward for that group", the chairman said, referring to business leaders. "But if we see retaliation, and significant trade disruptions, it's a different order of magnitude (which) could begin to affect global growth forecasts", said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

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