Daily Management Review

Fed Hikes Rate But Cuts Its 2019 Projection Of Further Hikes


12/20/2018




Fed Hikes Rate But Cuts Its 2019 Projection Of Further Hikes
The United State Central Bank – the Federal Reserve, again raised interest rates by a quarter point but also reduced its forecast for more hikes in the future.
 
True to the expectations of the market, the benchmark funds rate was raised from 2.25 percent to 2.5 percent by the central bank. The latest hike was the fourth by the Fed this year and the ninth overall since it started raising rates from December 2015.
 
The fed raised the hikes even though US president Donald Trump severely criticised on Twitter the rate hikes by it. On Monday, he said "it is incredible" that "the Fed is even considering yet another interest rate hike."
 
However, the Fed now is looking at two more rate hikes for 2019 which is comedown for the Fed but more than the no rate hike expected by the markets for next year.
 
The Fed statement announcing the hike was not entirely dovish, or easy about its forecast for rates. The Fed maintained in the statement that it would be appropriate to increase rates further. Its tone was apparently softer than before.
 
"The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term," the statement said.
 
In the statement the Fed used the word “some” to its projection for the future rate moves which was the difference in tone compared to the November post-meeting statement. The Fed also said that now "judges" rate increases to be appropriate compared to its statement in November where it had said that it expected rate hikes for next year. 
 
Before this week's meeting, the sense in the market about the outlook of the Federal Open Market Committee on rate hikes was that there would be three more hikes in in 2019 and tentatively one more in 2020.
 
That however changed because of tightening financial conditions and concerns that the moves of the Fed were too quick.
 
Following the announcement by the Fed, markets swayed and turned into the negative. There was a drop of 352 points in the Dow Jones Industrial Average.
 
"While this was a dovish hike from the stance that the Fed was in before, this is somewhat not as dovish as many participants probably wanted," said Charlie Ripley, senior investment strategist for Allianz Investment Management. "It would have been a difficult move for the Fed to completely remove some of the 2019 hike expectations, but I think they're making the message clear that they're going to remain more data dependent as we go into 2019."
 
The Fed also assured that it will "continue to monitor global economic and financial developments and assess their implications for the economic outlook."
 
This was in line with some of the recent statements from the Fed where it said that it would depend more on data in the future to make rate hike decisions.
 
"We think Fed Chair Powell delivered a clear message: when the Fed has reached the neutral target range, there is a need for greater caution and policy to become ever more data dependent," said Michelle Meyer, US economist at Bank of America Merrill Lynch. "This means that the threshold to bring rates into restrictive territory - above the neutral rate - is high. The Fed would need to see convincing data including a further decline in the unemployment rate, above target inflation with inflation expectations shifting higher and cooperative financial markets."
 
(Source:www.livemint.com)






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