Fed raises rates, suggests more to come

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"History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride". On the other hand, the unemployment rate projection was lowered.

Mumbai: Lack of surprises in the Federal Open Market Committee (FOMC) meeting outcome did not drag Indian stock markets on Thursday despite an interest rate hike by the U.S. central bank.

Oddly, the Fed kept its inflation forecast for the next two years the same even though it sees a stronger economy and falling unemployment rate.

Hong Kong fell 1.1 percent and Shanghai shed 0.5 percent. Low-interest rates will help finance the out-of-control federal deficit.

"A sense of uncertainty still remains over the future course of U.S. monetary policy after the expected rate hike", SBI Securities said in a commentary. It said it might raise rates three more times next year instead of two.

United States stocks initially rallied on the Fed announcement, which suggested no plans to immediately accelerate the pace of tightening monetary policy. The Dow was up about 200 points.

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The threat of a global trade war and a steady message from the Federal Reserve on US interest rates pushed the dollar to its lowest in over a month on Thursday and took Europe's main share markets into the red. The London Interbank Offered Rate, which is the rate at which worldwide banks lend to each other and serves as a benchmark for lending rates, has risen for more than 30 consecutive sessions and is at its highest since the financial crisis.

The Fed now expects economic growth to accelerate faster this year to 2.7%.

Hence, in its assessment of future growth prospects, the central bank increased its median forecast for US GDP to 2.7 percent (from 2.5 percent earlier) for 2018, and 2.4 percent (from 2.1 percent earlier) for 2019.

The unanimous decision on Wednesday's rate hike signals to Wall Street that Powell, for the time being, will stick with his precedessor Janet Yellen's plans for gradual rate increases. Financial conditions have tightened since late January as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger US growth and tight labour markets. More aggressive rate increases would likely slow the economy and make stocks less appealing. But a recent $1.5 trillion tax cut and $300 billion spending bill, along with an improved economic outlook, have more recently changed that calculus. The long-term average interest rate in the US is 5.73% (range 0.25% (Dec 2008) to 20% (Mar 1980)).

ANALYST'S TAKE: No one knows what to expect from the Fed meeting, Stephen Innes of OANDA Trading said in a commentary, "What we do know, however, is this meeting has lots of eyes on it and not just because it's Jerome Powell's first post FOMC press conference, but there's likely to be some nuanced changes in the Fed statement". The Fed had been gradually reducing its estimate of the long-run neutral fed funds rate since it began publishing its calculations in January 2012. Tighten too quickly and inflation may not meet its target of 2% - the level the Fed sees as healthy for the economy. Yellen gave the Feds a reality-check during her three years as chairman.

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