Daily Management Review

US Fed Increases Rate Based On Forecast Of Growth For Next Three Years At Least


09/27/2018




US Fed Increases Rate Based On Forecast Of Growth For Next Three Years At Least
Based on its presumption that the United States economy would have a good run for the next three years at least, the U.S. Federal Reserve again raised interest rates and carried on with its policy of slow but steady tightening of its monetary policy.
 
The benchmark overnight lending rate was lifted by a quarter of a percentage point to a range of 2.00 percent to 2.25 percent by the Fed while issuing a statement that essentially etched the end of the period for “accommodative” monetary policy.
 
The Fed still contemplated to increase rates in December this year, three more raises next year and one in 2020.
 
These increases would take the benchmark overnight lending rate to about 3.4 per cent which is about half a percentage point above the estimated “neutral” rate of interest, where the economy neither gets stimulated nor gets restricted, as stated by the Fed.
 
“The thing that folks were watching for, which they went ahead and did, was remove the word ‘accommodative’ in regard to their monetary policy,” said Michael Arone, chief investment strategist at State Street Global Advisors.
 
“It does seem to potentially indicate they believe monetary policy is becoming less accommodative and getting more towards that neutral rate.”
 
“It does seem to potentially indicate they believe monetary policy is becoming less accommodative and getting more towards that neutral rate.”
 
A policy outlook change outlook is not signalled by the removal of the wording that has been used by the central bank for its guidance for financial markets and households over the last decade, said Fed Chairman Jerome Powell.
 
“Instead, it is a sign that policy is proceeding in line with our expectations,” Powell, who took over as head of the Fed earlier this year, said in a press conference.
 
For the current year, the US economy is projected by the Fed to grow at more than expected rate of 3.1 per cent.  For the next three years at least, the economy would grow at a moderate rate driven by sustained low unemployment and stable inflation which would be around the 2 percent target, the Fed forecast.
 
“The labor market has continued to strengthen ... economic activity has been rising at a strong rate,” it said in its statement.
 
In its statement, no substitute language for the dropped ‘accommodative’ wording was inserted by the Fed. Since the Fed had started increasing rates in late 2015, therefore the wording had turned out be less and less accurate. The Fed gas raised the rates from near zero to in 2015 to what it is now through a sustained monetary tightening policy. The wording has been removed because the Fed now feels that the rates now are near neutral, said analysts.
 
“We’re doing great as a country. Unfortunately they just raised interest rates because we are doing so well. I’m not happy about that,” Trump told a press conference on the sidelines of the United Nations General Assembly in New York.
 
“I’d rather pay down debt or do other things, create more jobs. So I’m worried about the fact that they seem to like raising interest rates.”
 
While the Fed did said nothing about the earlier comments of criticism made by Trump, Powell said that the independence would be held by the central bank. Powell was a Trump appointee and was inducted earlier this year.
 
“We don’t consider political factors or things like that,” the Fed chief said.
 
(Source:www.reuters.com)






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