The Federal Open Markets Committee (FOMC) of the US Federal Reserve at its meeting on Wednesday chose to raise the target range for the federal funds rate to 2.25 per cent to 2.50 per cent, in view of the realised and expected labor market conditions and inflation.
It marked the fourth credit-tightening this year, a move that is likely to anger President Donald Trump who has repeatedly asserted that the Fed has been raising rates too fast.
Throughout Trump's term, the economy has been strong.
Following days of steep stock market losses, the president of the Federal Reserve Bank of NY sought to reassure investors that officials will listen to market signals in setting interest rates, emphasizing that their outlook for further gradual hikes is not set in stone. "We at the Fed are absolutely committed to that mission and nothing will deter us from doing what we think is the right thing to do".
In particular, the FOMC made a decision to reduce the number of rate hikes to two in 2019 (as we suggested in this post yesterday), down from three in the previous communication. In this case, the switch from the three-rate hike to the two-rate hike suggests that the interest differential in 2019 would be lower than expected and hence the Dollar should decrease.
The Dow lost 464 points, or 2 percent, to close at 22,860, the first time the blue-chip index has closed below 23,000 points since October of 2017. But bond prices surged, sending yields lower.
Fed Chairman Jerome Powell also said the central bank would continue drawing down the size of its balance sheet by $US50 billion ($70 billion) each month.
The Federal Reserve lowered its forecast for future rate hikes. He told Reuters the central bank "would be foolish" to proceed with a rate hike.
Three years ago, the Fed began moving away from the near-zero rate that had been in place since the peak of the global financial crisis. And a renewed US push against alleged intellectual property theft by Chinese nationals is contributing to uncertainty over the direction of the simmering trade conflict.
"It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike", he tweeted. In the Fed's policy statement and the language of Powell's press conference, by contrast, stock and bond market trading is "getting a pretty small amount of weight".
Powell acknowledged the shift in the Fed's strategy. "We're going to do our jobs the way we've always done them", he said when asked about White House pressure. But now, the risks of a surprise could rise. This will allow him to explain any abrupt policy changes.
"With the Fed stepping back, markets will be on their own in a way they have not been for decades", McMillan said. It is true that valuations for USA equities now look much more reasonable than they did a few weeks ago, but it is even truer for global equity markets. The benchmark rate will now sit in a range from 2.25 percent to 2.5 percent, abutting the lower end of what Fed officials consider the neutral zone: the region in which rates would neither stimulate nor restrain the economy. Just this week the Fed's projections showed a slowing economy and a slowing set of rate increases, while its statement was a bullish recount of USA strength. We sense that the FOMC is angling to give itself as much flexibility to respond to the evolution of the economic data as is possible.
The Commerce Department says growth in the gross domestic product, the economy's total output of goods and services, was revised down from an earlier estimate of 3.5 percent.
However, there are fears that conditions could turn tougher next year as the fiscal boost from Mr Trump's spending and tax cut package fades and the global economy slows.
By trimming the number of rate hikes they foresee in 2019, to two from three, policy makers signaled they may soon pause their monetary tightening campaign. "I think the Fed has gone insane", the president said in October.
"The really important message is the economy is strong".
The rate peaked at 2.4 per cent in July, but has move downwards since.
According to Federal Reserve Chairman Jerome Powell, the world's largest economy continued to strengthen this year, roughly in line with expectations.
Given the still-healthy US economy, the Fed would normally keep gradually raising rates to make sure growth didn't overheat and ignite inflation.
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