Saturday, 22 September, 2018

US Fed hikes key interest rate; says economic outlook stronger

US Fed hikes key interest rate; says economic outlook stronger US Fed hikes key interest rate; says economic outlook stronger
Scott Davis | 07 April, 2018, 00:42

On Wednesday, the U.S. central bank again raised its benchmark overnight lending rate by another 25 basis points- the fifth rate hike since it ended its ultra-low interest rate policy in December 2016, and setting current rates to a range of 1.50 percent to 1.75 percent.

Whether they expect three or four rate hikes this year, investment strategists agree that the USA central bank is in the process of normalizing policy, raising rates as the economy strengthens, which, according to McMillan, "has been the goal for years".

Indeed, the Fed's policy statement noted that "the economic outlook has strengthened in recent months ... labor market conditions will remain strong" and annual inflation "is expected to move up in coming months and to stabilize around the Committee's 2% objective over the medium term".

But the new economic forecast, which includes a median projection for the path of future rate hikes, made no change to the December projection for three hikes this year. Policymakers continue to project a total of three increases this year as they pursue a return to more normal interest rate levels, but the Fed's projections point to an extra increase in 2019, for a total of three rises that year, with more tightening in 2020. "The inflation forecast increased only slightly".

What's more, seven of the 15 participants on the Fed's policymaking arm favored four rate hikes in 2018, compared to just four members at the end of 2017.

Higher interest rates in the United States are usually followed by an outflow of foreign funds from upcoming economies such as India, which are considered to be 'risky'. The estimate for 2019 was increased from 2.1% to 2.4%. Many credit card loans already come with a variable interest rate pegged to Fed rate increases.

US Fed hikes key interest rate; says economic outlook stronger

The unemployment rate is estimated to fall to 3.8 percent in 2018 and 3.6 percent in 2019, both below the previous projections of 3.9 percent.

The Fed, under Yellen, pursued gradual rate increases and a highly choreographed sell-off of the portfolio of bonds it bought to help prop up the economy after the 2008 financial crisis. The Fed also outstandingly augments its prediction for US growth the two successive years.

Central bank officials said Wednesday they would raise their federal funds target rate by a quarter percentage point to a range between 1.5% to 1.75%. More specifically, if the Fed's goal is to normalize rates, what does it consider normal?

The ripple effect of the Fed rate hike may be felt in India, too.

The Trump administration stoked fears of a tit-for-tat trade war earlier this month when it confirmed tariffs on steel and aluminium products from overseas.

'This may indicate that the Fed believes there is more slack in the economy as the unemployment rate shows and/or the structural deflation forces, including demographics and technology destruction, remain in place, ' he added.




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