Tuesday, 14 August, 2018

Fed raises key interest rate

EURUSD Daily EURUSD Daily
Kenneth Drake | 22 March, 2018, 01:59

A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates.

The new target range for the federal funds rate is 1 1/2 percent to 1 3/4 percent. The US economy grew at an annualised rate of more than 3% during some quarters past year, while the unemployment rate is hovering at 4.1% - the lowest since 2000. Job gains have been strong in recent months, and the unemployment rate has stayed low. People were not surprised as Fed Chairman Jerome Powell had delivered a statement to Congress that implied the probability for a March rate hike.

With apologies to the classic 70s rock group Atlanta Rhythm section and recently installed Federal Reserve Chairman Jay Powell who will likely oversee the first wholesale interest rate hike program in quite some time, the markets eagerly await to see just how todays FOMC announcement is going to play out. Global bonds and stock markets will follow the USA markets in the rally. Dow e-minis were off by 35 points, and S&P 500 e-minis were 4 points lower.

"It's important that we do something, do what we can as a country to increase our potential growth rate", he said. "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. Growth will be 2.4 percent next year, the Fed expects, up from 2.1 percent.

The Fed said at the conclusion of a two-day policy meeting that it expects to increase rates another two times this year as it continues its climb back to more normal interest rate levels.

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


The meeting was the first led by Jerome Powell, and with a more hawkish voting slate, the attention was more on the SEP than the expected rate hike. As banks are charged more for money, they can raise rates on small business loans, credit cards and mortgages.

The move was the latest step away from years of stimulating the world's largest economy in the wake of the 2007-2009 financial crisis and recession.

The statement did not mention the extra government stimulus that has been added since the Fed's most recent economic forecast in the form of a $1.5 trillion tax cut and a budget agreement that will add $300 billion in government spending over two years. "That's why we are seeing a bit of a disappointment on the dollar side", said Minh Trang, senior foreign currency trader at Silicon Valley Bank in Santa Clara, California.

The Fed now sees the economy growing more quickly, expanding 2.7 percent this year, up from a previous estimate of 2.5 percent.

Central bankers admitted to being befuddled by the absence of inflation past year despite the economic recovery and strong job market, but Wednesday's statement repeated the view that 12-month inflation is expected to move up to the Fed's two percent goal "over the medium term".

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