Fed Holds Rates Steady And Signals More Rate Increases Ahead

12 November, 2018, 03:17 | Author: Brooke Harris
  • Image of fed fund futures

Federal Reserve policy makers meeting in Washington will weigh how to describe a moderation in US economic growth as they reinforce expectations for a fourth 2018 hike next month.

The U.S. interest rate is now in a range of 2 to 2.25 percent, but the Fed has signaled it wants to gradually raise rates in the coming months to 3 percent or slightly higher.

Despite a US trade war with key nations, weaker corporate investment and a sluggish housing market, the Fed is expressing confidence in the economy's resilience. Other tweaks in the statement could suggest less confidence in the need to raise rates three times next year, as officials projected in September. "All signs point to a rate hike at the December meeting". The 10-year Treasury note yield, a benchmark for both consumer and business borrowing costs, was 3.23 per cent, around the highest since 2011.

Fed officials at the September meeting pointed to three increases next year, but the market now is pricing in only two.

The Fed noted that business investment "has moderated from its rapid pace earlier in the year", a surprise since the tax cuts were expected to boost business spending. Given how upbeat the Fed's assessment of the economy is, Wall Street thinks a December rate hike is nearly certain.

Shortly after the US midterm elections, the US Federal Reserve voted to keep the benchmark interest rate the same at 2 to 2.25 percent.

The U.S. economy looks very strong on nearly every front, the Fed said several times in a statement released Thursday.

The Fed's policy decision was unanimous.

Data released in late October showed the United States economy grew at a 3.5 per cent annual rate in the third quarter, well above the roughly 2 per cent annual growth pace the Fed and many economists regard as the underlying trend.

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"Job gains have been strong, on average, in recent months, and the unemployment rate has declined".

Since the stock market started tumbling last month, President Donald Trump has attacked the Fed's rate hikes as well as Powell's leadership.

Beginning in 2019, Chairman Jerome Powell has said he will hold a news conference after each of the Fed's eight meetings each year, rather than only at every other meeting. That is roughly double the growth rate Fed officials believe can be sustained over the long run unless the supply of workers or their productivity increases more rapidly.

There were a few tweaks to the way policymakers are viewing economic conditions.

Powell's statements were followed by a prolonged stock market sell-off and a rise in short-term rates.

Powell, who was Trump's hand-picked choice to lead the Fed, has avoided responding directly.

"If Trump's public criticism for fed for tightening too rapidly is likely to have had effect on their deliberations, I think it's more like to make the Fed raise rates than not just to show that they are independent", said George Selgin, senior fellow at the Cato Institute.

"Almost all Fed officials appear to be on board with gradual hikes towards the 'neutral rate", referring to the level that central bankers consider interest rates as neither accelerating nor halting economic growth, Jan Hatzius, chief USA economist for Goldman Sachs, wrote in a recent note to clients.

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