Federal Reserve trudges interest rate to top most level

Fed expected to lift interest rates at Powell's debut
US Fed goes for 25bps rate hike in Jerome Powell's first meeting as chair
Author

24 March, 2018

The USĂ‚ Federal Reserve raised its benchmark interest rate Wednesday by a quarter point to a target range of 1.5% to 1.75% - the first hike under Chairman Jerome Powell.

That likely caused Fed officials to signal they expect a slightly more aggressive path for rate increases next year.

The central bank is trying to balance a low unemployment rate with the potential for higher inflation.

In a statement after its latest policy meeting, the Fed said it boosted its key short-term rate by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent. Higher rates could also lead to portfolio rebalancing by global investors. The fed funds rate, for example, topped out at 5.25% at the height of the last economic expansion from 2001 to 2007.

The Fed has been raising rates slowly since 2015, moving the U.S. away from the ultra-low levels put in place following the financial crisis.

In its first policy meeting under new Fed chief Jerome Powell, the USA central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.

Thailand's benchmark index yesterday fell 2.88 points to 1,798.55 at the close of trading. Prices rose to a two-week high of $1,336.59 on Wednesday, and also registered their biggest single-day percentage gain since May 17, 2017.

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 2% goal "over the medium term".

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But consider that approximately $62.50 a year has already been added as a result of the Fed's five rate hikes since late 2015, and interest payments may be up by $100 at the end of the year. The Federal Reserve raised interest rates, as investors expected, and said it could raise rates at a quicker pace next year.

The Federal Reserve is sticking to a cautious strategy on raising interest rates in 2018, but some officials left scattered hints they are more anxious about rising inflation than the central bank let on. The estimates for inflation excluding food and energy, which officials see as a better way to gauge underlying price trends, rose to 2.1% in 2019 and 2020 from 2% seen in December.

It is also interesting to note that Powell said the US tax cuts will unlikely push US GDP growth to 3 percent (y/y) as desired by US President Donald Trump, while Powell also detects growing concerns about the negative consequences for the US economy in case a trade war breaks out.

However, he also acknowledged that central bankers now consider the prospects of a global trade war a "more prominent risk" to the economic outlook.

"We are trying to take the middle ground here", Powell said in a press conference after the end of the policy meeting, adding that there were no signs the economy was on the cusp of accelerating inflation. Other social media companies in the USA also finished the day lower on concerns that the government might enact new laws affecting their businesses. In January, officials described economic activity and job growth as "solid". Fed representatives now utter an upsurge from their former prediction done prior to the Republican tax cuts was concluded. The central bank forecast two more rate rises for 2018, while predicting three more increases next year and two more in 2020.

Those higher estimates may reflect the expected impact of the additional government spending.

Unusually low inflation, combined with slow economic growth, helps explain why the Fed has steadily reduced its "longer run" fed funds target since 2012. The unemployment rate in 2018 is predicted to fall to 3.8%, down from the prior forecast of 3.9%.

The Fed's preferred inflation measure is forecast to barely move up to 2 percent next year.


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