Rising risks - on Fed rate hike

Mar 24, 2018, 12:36
Rising risks - on Fed rate hike

They now point to at least three rate hikes this year and if only one member switched from three to four, we would be looking for four hikes.

"The labor market has continued to strengthen and that economic activity has been rising at a moderate rate", the Fed said in a statement on Wednesday. "Ongoing job gains are boosting incomes and confidence, [and] foreign growth is on a firm trajectory", Powell said in his first news conference, which was significantly shorter than those of his predecessor Janet Yellen.

"This is unlikely to be the last rate hike this year, which means if a business needs to use loans to expand, it should do so sooner rather than later", Polk added.

Some analysts say a short-term economic stimulus from Congress - in the form of a $1.5 trillion tax cut and federal spending increases - could eventually push the Fed to add a fourth rate move. The Fed forecasts the unemployment rate will be 3.8 percent in 2018 and will decrease to 3.6 percent in 2019 and 2020.

In the briefing with reporters, Powell hued to the FOMC plan for gradual rate increases. The Fed expects the United States unemployment rate, now at 4.1 per cent, to come down to 3.8 per cent in 2018 and 3.6 per cent in 2019, both revised higher from the December projection of 3.9 per cent in 2018 and 2019. In addition, they expect the level to reach 3.4% in 2020 compared to 3.1% in the December forecast.

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The S&P 500 Index of US stocks were higher after Powell spoke, while the yield on 10-year US Treasury notes were around 2.89%, little changed from Tuesday.

The dollar changed hands at 105.91 yen in early Asian trade, down from 106.04 yen late Wednesday in NY and 106.33 yen in Tokyo late Tuesday.

His lack of economic formalism came through again as he backed away from being specific about the changing relationship between labour market slack and inflation - a critical issue now for the pace of Fed tightening.

Wednesday's rate increase was widely expected, but there are new faces on the committee, raising questions about whether policymakers will move more quickly in coming months.

The forecast table indicated that growth over the next three years should be greater than expected in December, the unemployment rate will be lower and most importantly, the funds rate is now projected to top out at 3.4%, not 3.1%. Officials raised their median estimates for economic growth this year to 2.7 percent, up from 2.5 percent in December.

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The central bank projects economic growth at the rate of 2.7% in 2018, up from the previous expectation of 2.5%, attributed to the encouraging USA consumer confidence. The Fed's dovish statement supported more market upside, he said. Higher borrowing costs could squeeze both markets and the wider economy.

Shares in US social media giant Facebook fell 2.6 percent.

The Fed upgraded its economic outlook and increased its 2019 expectations for the Fed funds rate.

The committee's forecast for the long-run sustainable growth rate of the economy was unchanged at 1.8%, suggesting policy makers are still sceptical of the effect of tax cuts on the economy's capacity for growth. Although inflation has remained subdued in recent years, the possibility of a pickup in prices on the back of fiscal stimulus and lower unemployment can not be completely ruled out.

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