Fed raises interest rates and signals faster hikes on the way

Adjust Comment Print

There were few surprises in the Federal Reserve's decision on interest rates Wednesday.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 per cent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signalled it would tolerate above-target inflation at least through 2020. Inflation is expected to rise to 2.1% this year. Rates for vehicle loans and variable-rate mortgages are also likely to increase.

They see another three rate increases next year, a pace unchanged from their previous forecast.

While investors and economists spend the next few days deciphering new Fed Chairman Jerome Powell's decision to hold a press conference after every meeting and what the projected path of future hikes means for the economy, the lastest hike will hit your wallet nearly immediately. "Most people who want to find jobs are finding them, and inflation and interest rates are low".

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation.

That statement was generally perceived by analysts as extremely hawkish.

After keeping rates low and flooding markets with trillions of dollars in asset purchases, "the story now is coordinated central bank tightening and exit", said Robin Brooks, managing director and chief economist at the Institute of International Finance. With the yield on 2-year securities closely tied to the fed funds rate, the Fed's threat to increase the rate two more times this year threatens to invert the yield curve over the coming months. Compared with the latest U3 unemployment rate of 3.8% in May, the Fed chairman and his colleagues assume the rate will drop to 3.6% this year. "We don't know what that will be", Powell said. "The overall outlook for growth remains favourable".

Julen Lopetegui, entraîneur du Real Madrid après le Mondial
Cette équipe doit continuer à gagner, et pour ça, je pense qu'elle a besoin d'un changement. Auparavant, le natif de Marseille avait mené une brillante carrière de joueur.

"It makes sense that if you lower the corporate tax rates, you will encourage greater investment".

Powell declined to comment on any specific policy, but he said Fed officials around the country are reporting concerns from businesses. "The feeling is that the uncertainty that the Fed brought to the market kept the rand and other emerging market (EM) currencies under pressure, and now that bridge has been crossed, a calmer market could be the order of the day", said Botha.

One area that's growing less than expected is workers' earnings, Powell conceded.

"I certainly would've expected wages to react more to the very significant reduction in unemployment that we've had, as I mentioned from 10% to 3.8%", he said. "Everywhere we go we hear about labor shortages, but where's the wage reaction?"

The current economic expansion is the second-longest in USA history, and will set a record if it lasts a bit more than a year longer.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in USA history while meeting inflation and employment objectives", said Stephen Gallagher, chief US economist at Societe Generale.