US Federal Reserve raises lending rate; signals slower pace ahead

Oscar PerryDec 22, 2018

The Federal Reserve on Wednesday raised USA interest rates for the fourth time this year as expected.

"The market is fearing a global slowdown and is still anxious about the Fed, even though they dragged (New York Federal Reserve President John) Williams out to try to cushion what Chairman (Jerome) Powell said on Wednesday".

The Fed boosted interest rates up a quarter-point to a range of 2.25 per cent to 2.5 per cent, the highest rate in more than a decade.

When the Fed Funds Rate is lowered, it makes cash more easily available and can help strengthen the economy, while an increase of the Fed Funds Rate can cause cash to become more scarce, which can have a detrimental impact on the economy.

The fed acted after an extraordinary pressure campaign by President Trump, who fears further rate hikes will undermine the USA economy, which could in turn cause him political challenges.

The move showed that the Fed sees the economy growing quickly enough to require a tap on the monetary brakes to keep it from overheating.

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. We are absolutely committed to that mission and nothing will deter us from doing what we think is the right thing to do.

But now, a day after fresh Fed forecasts showed most policymakers see two rate hikes next year and one in 2020, the betting in rate futures markets is that they will need to backtrack.

USA stocks had been up sharply before the Fed's announcement, but the Dow Jones Industrial Average closed down about 352 points. The 5-year high yield CDX index's spread rose 16 basis points (or 0.16 percentage point), and the 5-year investment grade CDX's spread rose four basis points. "So volatility is probably going to be accompanying the movements in the market today", said Peter Cardillo, chief market economist at Spartan Capital Securities in NY. A global slowdown is already weighing on growth.

Global financial markets are ending 2018 with some heavy losses, as investors worry that growth is slowing. and that America's central bank is pressing on with interest rate hikes regardless.

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"We're going to be letting incoming data inform our thinking about the appropriate path" of future rate increases, he said. But now, the risks of a surprise could rise. Instead, he has decided, beginning in 2019, to hold news conferences after each of the Fed's eight meetings each year, rather than only quarterly. This will allow him to explain any abrupt policy changes.

The additional news conferences raise the likelihood that every Fed meeting could be the occasion for adjusting Fed policy in ways that might upset the markets.

Some analysts say the Fed may want to pause in its credit-tightening to assess how the economy fares in the coming months in light of the headwinds it faces.

INTEREST ON EXCESS RESERVES - The crisis upended the Fed's method for controlling its target interest rate, which it previously had done by raising or lowering the supply of scarce reserves in the banking system. The 10-0 decision lifted the federal funds rate target to a range of 2.25 per cent to 2.5 per cent.

Powell parried three questions about whether the Fed meant to restrict the economy with its rate policy, but gave little away.

Economic data was also mixed, with data showing consumer spending increased solidly in November and an unexpected fall in orders for key USA -made capital goods.

"I think the market reaction is completely overblown", Mnuchin said in an interview with Fox Business, noting that the economy is still projected to out-perform other countries next year. Consumers, the main driver of the economy, are spending freely. "Inflation has still remained just a touch below two percent".

The S&P 500 fell 39 points, or 1.6 percent, to 2,467. Its statement described the economy as strong. The decline reflects the scaling back of both the number of increases the Fed expects and the neutral rate it is seeking.

At the same time, Powell tried to make clear the Fed would not blindly pursue its effort to normalize borrowing costs at the risk of inadvertently triggering a recession. It also signaled there'll be two more hikes next year.

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