19 October 2018
Federal Reserve Chair Janet Yellen speaks at a news conference in Washington Wednesday after a two-day policy meeting. Photo: Reuters
Federal Reserve Chair Janet Yellen speaks at a news conference in Washington Wednesday after a two-day policy meeting. Photo: Reuters

Fed hikes rates; signals faster tightening pace

The US Federal Reserve on Wednesday announced a quarter-percentage point hike in its benchmark interest rate, citing an improved labor market, firming inflation and better economic growth.

The move, which was widely expected by the market, takes the federal funds rate to a range of between 0.50 percent and 0.75 percent.

Following a two-day policy meeting, the Fed signaled a faster tightening pace next year, saying the “near-term risks to the economic outlook appear roughly balanced”.

As Washington prepares for a new government led by Donald Trump, who has promised tax cuts, spending and deregulation, policymakers have to adapt to the situation.

At a news conference Wednesday following the rate decision, Fed Chair Janet Yellen said Trump’s election win has prompted some policymakers to shift their view of what’s to come, Reuters reports.

“All the (Federal Open Market Committee) participants recognize that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy,” Yellen said.

Though Trump’s inauguration is still a month away, “some of the participants” had begun shifting their assumptions about fiscal policy, the Fed chief said.

Yellen was bombarded with questions related to the president-elect, but she refused to comment on the incoming leader or give advice on how any fiscal, tax or trade plan should be structured.

“I am not going to offer the incoming president advice about how to conduct himself,” she said.

But partly as a result of the changes anticipated under Trump, the Fed sees three rate hikes in 2017 instead of the two foreseen as of September.

Yellen described that as a “very modest adjustment”, given the strong job gains and evidence of faster inflation.

Wednesday’s rate increase should be “understood as a reflection of the confidence we have in the progress the economy has made,” Reuters quoted her as saying at the news conference.

Fresh economic forecasts showed policymakers shifting their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed’s 2 percent target.

The projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run “normal” 3.0 percent, according to Reuters.

That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.

The prospect of faster rate hikes led to a sell-off in shorter-dated US Treasuries and stocks on Wednesday.

Yields on shorter-dated Treasuries hit their highest levels in more than five years. The dollar rose against a basket of currencies and gold hit its lowest level in more than 10 months.

Wednesday’s rate increase was the first since last December and only the second since the financial crisis, when the Fed cut rates to near zero.

– Contact us at [email protected]


EJI Weekly Newsletter

Please click here to unsubscribe