April 23, 2018

What does US Fed interest rate hike mean for Indian markets?

24 March 2018, 01:38 | Lionel James

Shares dollar slip as jitters mount on Fed trade and techMore

Shares dollar slip as jitters mount on Fed trade and techMore

But there was a hawkish tone in some of the Fed's observations, and Powell for the first time said the Fed expects above-target core inflation of 2.1%.

In the FOMC's statement, the USA central bank made no change to the three hikes they expect for this year but added one more hike to the dot plot in 2019.

The statement did not mention the extra government stimulus that has been added since the Fed's most recent economic forecast in the form of a $1.5 trillion tax cut and a budget agreement that will add $300 billion in government spending over two years.

The Federal Reserve said the 0.25% change was being made to reflect a strengthened economic outlook.

The Fed said that the United States economic outlook had strengthened over the past months on expectation for inflation to rise in the coming months, taking the rate close to the Fed's target.

"Considering the Fed just hiked interest rates for the sixth time in this tightening cycle and revised up its rate expectations for 2019, the price of gold is faring quite well", she added.

On Wednesday, the Federal Reserve announced it will increase its benchmark interest rate to between 1.5% and 1.75%, and suggested rates would go up at least two more times in 2018. It's the first move in what's expected to be a busy year, with Fed members indicating they expect to pass two or three additional hikes before next January. The US economy grew at an annualised rate of more than 3% during some quarters a year ago, while the unemployment rate is hovering at 4.1% - the lowest since 2000.

The Fed forecasts 2.4 percent GDP growth in 2019, and 2 percent in 2020. It is, after all, no secret that private corporations attracted by ultra-low interest rates had heavily loaded up on debt over the last decade.

In the time since December 2015, when Yellen approved the first interest rate increase in nearly a decade, rates on consumer loans have slowly crept up - but are still far below pre-recession levels.

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"With the unemployment rate now firmly below its long-run equilibrium, the implication is that the Federal Reserve (Fed) needs to normalise rates at a gradual and regular pace".

A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things.

The financial markets have been edgy for weeks, and Powell's back-and-forth comments have been only one factor.

Two-year US yields slipped to 2.304 percent from 9 1/2-year high of 2.366 percent.

"It's important that we do something, do what we can as a country to increase our potential growth rate", he said. But subsequent reports on wages and inflation have been milder, and the markets appear to have stabilized.

"More measures may follow, and tit-for-tat responses could lead to escalation".

So far, the Fed has been moving gradually to tighten monetary policy to prevent the world's largest economy from overheating. Even after six rate increases over the past 27 months, the Fed's benchmark rate remains in a still-low range of 1.5 percent to 1.75 percent, up from a record low near zero as recently as December 2015.

A bigger risk for now is the looming trade war following the US' decision to hike import tariffs on steel and aluminum.

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