The Federal Reserve has raised interest rates
again despite President Donald Trump’s opposition.
The Fed’s key interest rate has been increased by 0.25% to a target range of
2.25%-2.5%.
However, the Fed officials also said future increases could come at a slower
pace amid concerns about global growth.
The move comes two days after President Trump warned the Fed against making
“yet another mistake” in raising rates, urging it instead to
“feel the market”.
The president also urged the bank not to wind down a multi-billion dollar
stimulus program brought in after the financial crisis.
President Trump – who appointed the Fed’s chairman, Jerome Powell – has
repeatedly blamed the central bank for unsettled markets and dismissed analysts
who cite other factors, such as rising trade tariffs.
His remarks have put pressure on the Fed, as presidents generally avoid criticizing
the bank publicly, for fear of politicizing the institution.
President Trump tweeted: “I
hope the people over at the Fed will read today’s Wall Street Journal Editorial
before they make yet another mistake. Also, don’t let the market become any
more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t
just go by meaningless numbers. Good luck!”
At a press conference on December
19, Jerome Powell defended the Fed’s independence, saying that political
pressure played “no role whatsoever” in its discussions or decisions.
The Fed’s chairman added that the
central bank had no plans to change its ongoing reduction of its portfolio of
Treasuries and mortgage-backed securities.
The central bank has been gradually
raising the benchmark rate since 2015, moving the US away from the ultra-low
rates put in place during the financial crisis to spur economic activity.
The decision, which was widely
expected, marked the ninth increase since 2015 and the fourth this year.
However, the moves have made
borrowing more expensive, contributing to slowdowns in some sectors, such as
housing.
With economic growth expected to
slow, some worry that further increases risk stifling economic activity.
On December 19, officials did cut their forecasts for economic growth in
2019 to 2.3%, down from the 2.5% they anticipated in September.
Estimates released by the bank showed most Fed members expect two rate
increases in 2019 – not three, as previously forecast.
It follows a downturn in financial markets and concerns about slowing growth
in the US and abroad.
However, Jerome Powell said the strength of the US economy – which is
expected to grow about 3% this year – justified another rate rise, despite
recent “cross currents” that have weakened the outlook.
He said: “We think this move was
appropriate for what is a very healthy economy.
“Policy at this point does not
need to be accommodative.”
In its official statement, the Fed also said increases to its benchmark rate
would help the US economy sustain its expansion, keeping the unemployment rate
low and inflation near 2%.
Shares sank after the announcement, reversing earlier gains. The Dow and S&P 500 closed about 1.5% lower, while the NASDAQ fell than 2%.
The Fed policymakers have been grappling with when and how to alter the policies put in place after the 2008 financial crisis to boost economic activity.
At the time, they cut interest rates and bought up US treasuries and mortgage-backed securities to keep rates low.
The Fed has a $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the financial crisis and recession.
On June 14, policymakers said they aim to reduce that balance sheet, by reinvesting payments from those securities only above certain caps, totaling $10 billion.
The cap would escalate in three month intervals. It would start implementing those policies this year, assuming economic growth continues.
Janet Yellen said she’s not sure how far the committee will want to reduce the holdings over the long run, but she said they would be levels “appreciably below” those seen in recent years though larger than before the financial crisis.
The Fed raised interest rates for the first time since the crisis in December 2015.
Policymakers acted in December 2016 and again in March.
The June 14 decision was made with an 8-1 vote, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, dissenting. Neel Kashkari also voted against the March rise.
Interest rates remain low by historic standards. The board expects to raise rates at least three times this year.
The moves depend on the strength of the economy, which has been mixed.
On June 14, the US Labor Department reported that prices for goods excluding food and energy increased by 1.7% from May 2016, slowing steadily from earlier in the year.
That fell short of the Fed’s target of 2%.
Janet Yellen said the bank is aware of the shortfall and it was “essential” to move back to the target.
However, she said this year’s data may be skewed by one-off factors, such as lower prices on cell phone plans.
“It’s important not to overreact to a few readings,” she said.
“Data on inflation can be noisy.”
For US consumers, interest rate increases tend to lead to increased borrowing costs.
The Fed has raised its benchmark interest rate by 0.25% for only the third time in a decade.
It voted to raise its key rate target to a range of 0.75% to 1%.
The central bank had been expected to raise rates after a robust February jobs report, solid pay gains, rising inflation and a dip in the unemployment rate to 4.7%.
The Federal Reserve aims to keep the cost of lending between banks within a specified band, which it does by buying or selling financial assets.
It is raising that band by a quarter of a percent.
Fed Chair Janet Yellen said the committee judged that a “modest increase” in the rate is appropriate “in light of the economy’s solid progress.”
She added: “Even after this increase, monetary policy remains accommodative, thus supporting some further strengthening in the job market, and a sustained return to 2% inflation.”
The decision was approved with a 9-1 vote. Neel Kashkari, the head of the Fed’s regional bank in Minneapolis, cast the dissenting vote.
This is the second time the Fed has raised rates in three months. It signaled that further hikes this year will be gradual.
The Fed’s statement said its inflation target was “symmetric,” indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.
Wall Street stock indexes jumped after the announcement, with the Dow Jones Industrial Average up 112 points at 20,950 in afternoon trading.
The US dollar fell about 0.9% against the euro and more than 1% against the pound.
The Fed’s outlook for the economy changed little, with officials expecting economic growth of 2.1% this year and next year before slipping to 1.9% in 2019.
Those forecasts are far below the 4% growth that President Donald Trump has said he can produce with his economic program.
However, Janet Yellen told reporters that she didn’t believe it is “a point of conflict” between the Fed and the Trump administration.
“We would certainly welcome stronger economic growth in the context of price stability, and if policies were put in place to speed growth… those would be very welcome changes that we would like to see,” she said.
The European stock markets have surged after the Federal Reserve increased interest rates for the first time since 2006.
The main share indexes in France, the UK and Germany’s were all up by between 1% and 3% in morning trade.
The US central bank increased the range for its benchmark interest rate to between 0.25% and 0.5%, from the previous range of 0%-0.25%.
The Fed said the rise was part of a “gradual” process to get rates back to normal after years of being near zero.
“Considerable improvement” in the jobs market spurred the Fed into action.
London’s FTSE 100 rose 1.4% to 6,146.68, while Frankfurt’s Dax jumped more than 3% and the Cac 40 in Paris was 2.5% higher.
Photo Reuters
The European stock markets were following the lead given by markets in the US and Asia.
On Wall Street, the Dow Jones closed up 224.18 points, or 1.3%, at 17,749.09, while in Japan, the benchmark Nikkei 225 closed up 1.6% at 19,353.56.
After the Fed’s decision, the dollar rose against larger major currencies. Higher rates make the US a more attractive market for deposits, meaning demand for the dollar is likely to rise.
However, sterling recovered ground lost against the dollar and was 0.3% higher against the euro to €1.3783 after positive retail sales numbers for November.
At one point £1 bought almost $1.50.
British government-issued bonds, or gilts, rose in price following the Fed decision, meaning lower yields, or income.
Benchmark ten-year gilt yields fell 0.056 percentage points to 1.89%. While the specter of higher rates is often bad for existing debt prices, analysts said investors were pleased future Fed rate rises would be “gradual” in nature.
The Federal Reserve has announced it is raising interest rates by 0.25 percentage points.
This is the US rate’s first increase since 2006.
The move takes the range of rates banks offer to lend to each other overnight – the Federal Funds rate – to between 0.25% and 0.5%.
The move is likely to cause ripples around the world, and could increase pressure on the UK to raise rates.
It could also mean higher borrowing costs for developing economies, many of which are already seeing slow growth.
There are concerns that a rise will compound that slowdown, as higher rates in the US could strengthen the dollar, the currency in which many countries and companies borrow.
It puts US policy at odds with that in Europe, where even easier borrowing terms are being implemented.
The European Central Bank (ECB) earlier this month cut overnight deposit rates from minus 0.2% to minus 0.3% and extended a €60 billion stimulus program.
The US rate rise vote was unanimous.
The Fed also raised its projection for its economic growth next year slightly, from 2.3% to 2.4%.
That suggests the bank does not think the rate increase will damage growth. US share markets jumped in response.
The Dow Jones went from a 50-point rise to stand up 79 points at 17,612.79 – a 0.5% gain.
Rates in the US have been at near-zero since 2008.
The Fed cited as the reasons for its action increased household spending and investment by business, along with a continued low rate of inflation.
In its statement, the committee said: “The committee judges that there has been considerable improvements in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective.”
The Fed has said it will continue to monitor inflation and employment to determine if and when further rise are justified.
The Federal Reserve chairwoman, Janet Yellen, said the committee was confident the economy would “continue to strengthen” but it still has “room for improvement”.
Future action will depend on how the economy moves forward and will be gradual.
Janet Yellen acknowledged weakness remained in the labor market, particularly wage growth.
She warned that if the Fed had continued to delay a rate rise, it could have been forced to tighten monetary policy too quickly, something that could have led to another recession.
The Fed’s medium-term projection for the Federal Funds rate is 1.5% in 2016 and 2.5% in 2017.
The bank will not get close to normal levels of around 3.5% until 2018 when it expects the economy will be back on a solid track.
“Were the economy to disappoint, the Federal Funds rate would likely rise more slowly,” said Janet Yellen.
Janet Yellen gave little clues as to the timing of the next move, saying: “I’m not going to give you a simple formula for what we need to raise rates again.”
The US Consumer Price Index (CPI) increased by 0.2% in October 2015, after two months of declines.
The figures, along with the strong employment numbers in October, increase speculation that the Federal Reserve will raise interest rates in December.
Prices were pushed up by the rising cost of electricity and a resurgence in petrol prices.
A survey of US fund managers by Bank of America Merrill Lynch found that four-fifths of the managers surveyed expected a rate rise next month.
The so-called core CPI, which strips out food and energy, also rose 0.2% after a similar increase in September.
Medical costs accounted for much of the increase. Medical care prices rose 0.7%, the largest increase since April, and hospital costs increased by 2%.
Although food prices rose only 0.1%, the smallest gain since May, they edged up 0.4% in September and four out of six of the indexes compiled by the big grocery store food groups showed the largest increase since August 2011.
The biggest price falls were in clothing, shoes and new cars.
Over the entire 12 months through to October, the core CPI increased by 1.9%.
The Federal Reserve has decided to hold interest rates unchanged, keeping them at the same level since December 2008.
The central bank said nine members of its Federal Open Market Committee voted to hold the key federal funds rate target at 0 to 0.25%.
Committee member Jeffrey Lacker was the only dissenter, favoring a 0.25 percentage point rise.
The Fed hinted that concerns about the strength of the global economy influenced the decision.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the committee said in a statement.
Signs of weaker growth and stock market turmoil in China have led to fear among investors about US economic growth.
The Federal Reserve’s long-term policy is to keep interest rates low until employment levels improve further and the main US inflation rate approaches its 2% target. Inflation is currently at about 1.2% in the US, kept down by cheaper oil and a strong dollar.
The Fed said in its statement that it still wants to see more improvement in the labor market, even though recent data showed the unemployment rate for August was at 5.1%, the lowest since 2008.
It also wants to be “reasonably confident” that inflation will increase.
“The committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run,” it said.
Following the Fed’s announcement, US stocks rose and the dollar fell.
The Dow Jones industrial average was up 0.28%, to 16,786.58, the S&P 500 rose 0.45%, to 2,004.26 and the NASDAQ gained 0.61%, to 4,918.90.
The dollar index, which compares the value of the currency with six other currencies, fell 0.81%, to 94.651.
Asian shares fell after the US Federal Reserve hinted that it might raise interest rates as soon as 2015.
Hong Kong’s Hang Seng index officially hit “bear” territory, falling by 1% for a cumulative 20% decline since December 2, 2013.
The Nikkei fell 1.65% and the Shanghai Composite dropped 1% as well.
In her first meeting as Fed chair, Janet Yellen said the central bank would increase rates about six months after finishing its bond-buying program.
Most analysts expect that will occur towards the end of 2014.
The early rate rise indicator surprised many investors, who had expected rates to remain low for a longer period of time.
Asian shares fell after the US Federal Reserve hinted that it might raise interest rates as soon as 2015
That led to renewed fears that the end of easy money could negatively impact emerging economies that relied on foreign investors.
The falls in Asian markets followed a broad sell off in US markets.
The decline in the benchmark Nikkei comes despite Bank of Japan (BOJ) governor Haruhiko Kuroda’s comments on Wednesday that the country was on track to meet the bank’s 2% inflation target.
The BOJ has been engaged in a massive stimulation effort to combat deflation and encourage spending.
Japan recently reported its smallest trade gap in nine months, after January saw a record surge in imports ahead of the tax changes.
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