Fed raises lending rate, signals slower pace
Credit to Author: AGENCE FRANCE-PRESSE| Date: Thu, 20 Dec 2018 17:37:40 +0000
WASHINGTON, D.C.: The US Federal Reserve raised the benchmark interest rate on Wednesday, staking its independence despite repeated attacks by President Donald Trump, but it also sent a clear signal it expects to take it slow next year in the face of plateauing growth.
The Fed’s fourth rate increase of the year, which sent Wall Street tumbling, moved the central bank squarely into the crosshairs of the president, who had said earlier a rate hike would be “foolish.”
Asked about the dangers of Trump’s twitter rants disrupting decision-making, Federal Reserve Chairman Jerome Powell told reporters political considerations played “no role whatsoever” in the central bank’s deliberations.
In a unanimous decision, the Fed delivered on what some economists called a “dovish hike,” raising the target range for the federal funds rate by 0.25 point, with 2.5 percent at the high end, while providing the clearest signal to date of a cautious stance moving forward, especially as it keeps an eye on potential international risks.
Despite generally healthy growth, Powell acknowledged the increased sense of caution due to “developments that may signal some softening, relative to what we were expecting a few months ago.”
“Growth in other economies around the world has moderated somewhat over the course of 2018, albeit still solid levels,” he told reporters.
Since inflation has remained moderate, that allows the Fed “to be patient” in raising rates moving forward.
And central bankers now expect just two increases next year in the key rate used to set the cost of borrow for everything from cars to homes.
The less upbeat outlook sent shares tumbling and Wall Street closed down sharply, while the dollar advanced against the euro.
“Faced with political pressure from the president to stop raising rates and panic on the part of investors who were seeing their massive capital gains disappear, the Fed could have punted. Instead, it decided to continue trying to win the game,” economist Joel Naroff said.
While he highlighted Powell’s focus on solid growth prospects, Naroff said the markets may have wanted the Fed to keep rates on hold next year.
“You would think that continued good growth and inflation under control would be good news for the markets. Wrong again.”
International risks?
After the two-day policy meeting said the central bank said it “will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
The US is facing potential challenges from Trump’s trade war, a slowing Chinese economy and the potential economic and financial turmoil that could come in the wake of Britain’s exit from the European Union.
Increasing signs the US economy may have peaked have caused stock markets to crumble in recent weeks, with Wall Street wiping out all of its 2018 gains.
The policy-setting Federal Open Market Committee also released its quarterly forecasts showing officials see economic growth moderating so that they now expect to increase the benchmark interest rate only twice next year rather than three times, as forecast in September.
Five Fed officials slashed their outlook for interest rates, and now expect two or fewer hikes rather than four or more in the coming year.
The Fed’s median forecast for GDP growth was cut to 2.3 percent for 2019 from 2.5 percent, which in turn brought the inflation outlook once again below the Fed’s two percent target, even with unemployment remaining at a 50-year low of 3.5 percent next year.
Even with the continued strong job gains, wages have not accelerated, and prices have crept up only gradually, removing pressure on the central bank to put the brakes on the US economy.
Powell cautioned that the forecasts were individual views, not a definite plan for the Fed, and that officials would revise their assessments as new data came in.
However, economists and analysts view them as a clear signpost for Fed action.
“The change to the Fed’s tone is a nod to the increased uncertainties, slower global growth, [and] lower inflation,” said Mickey Levy of Berenberg Capital Markets.
AFP
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