Fed lifts interest rates, keeps 2018 policy outlook unchanged

Posted by on December 14, 2017

The Federal Reserve increased interest rates by a quarter of a percentage point on Wednesday, as expected, but left its speed outlook for the forthcoming years unchanged even as policymakers projected a short-term acceleration in U.S. economic expansion.

The move, coming in the last policy meeting of 2017 and on the heels of a flurry of relatively bullish economic data, represented a success for a central bank which has pledged to keep a gradual tightening of monetary policy.

Having increased its benchmark overnight lending rate three times this season, the Fed estimated three more hikes in all 2018 and 2019 before a long-run degree of 2.8 percent is reached. That is unchanged from the previous round of predictions in September.

“Economic activity has been rising at a good pace … job gains have been strong,” the Fed’s policy-setting committee said in a statement in which it declared the federal funds rate was lifted to a target variety of 1.25 percent to 1.50 percent.

U.S. stocks extended gains after the launch of the policy announcement, while Treasury yields dropped to session lows. The U.S. dollar dropped against a basket of currencies.

Fed Chair Janet Yellen, in her final press conference before her four-year term ends early next year, pointed to the Trump government’s proposed tax reform as the impetus for an update of policymakers’ economic growth predictions.

The Fed currently sees gross domestic product growing 2.5 percent in 2018, up from the 2.1 percent forecast in September. The rate of growth is expected to cool to 2.1 percent in 2019, marginally higher than the previous forecast of 2.0 percent.

“Most of my coworkers depended in the prospect of financial stimulus, along the lines of what is considered by Congress, into their projections,” she said.

But Yellen said the exact effects of the tax program, including a sharp decrease in corporate income taxation, depended on various factors.

“While changes in taxation policy will probably provide some lift to economic activity in coming years, the size and time of the macroeconomic effects of any tax package stay uncertain,” she said.

Yellen will be succeeded at the helm of the central bank by Fed Governor Jerome Powell.

INFLATION CONCERNS

The Fed also said on Wednesday it expected the country’s unemployment rate would drop to 3.9 percent next year and stay at that level in 2019. It had forecast a jobless rate of 4.1 percent for those two decades.

But inflation is projected to remain shy of the central bank’s 2 percent target for another year, with weakness on that front still enough of a concern that policymakers saw no reason to accelerate the anticipated pace of rate rises.

Meaning that the tax cuts, if passed by Congress, would take effect without the Fed having flagged any probable response in the shape of higher prices or concerns of a jump in inflation.

“It shows at least some members of the Fed do not find any reason to keep hiking rates in an environment in which the market is growing more strongly but surely not overheating and where inflation has not become a problem and does not look like it will be one,” said Kate Warne, investment strategist at Edward Jones.

Policymakers do see the federal funds rate increasing to 3.1 percent in 2020, slightly above the 2.8 percent “neutral” rate they expect to keep in the long term. That indicates possible concerns about a rise in inflation pressures over time.

As it stands, inflation is forecast to stay below the Fed’s goal in the near term and has been tracked “closely” by policymakers.

Yellen reiterated that the inflation outlook was considerably uncertain. “We recognize there’s been a protracted shortfall … (it is) among the risks facing coverage,” she said.

Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari dissented from the policy statement on Wednesday.

The Fed also said that, as of January, it would increase the quantity of Treasury bonds and mortgage-backed securities that it wouldn’t reinvest on a monthly basis to $12-billion and $8-billion, respectively. That is consistent with its balance sheet reduction program.

Courtesy: The Globe And Mail

Posted in: Market News

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