US Fed raises interest rates by 0.25%; top takeaways from the FOMC meet

As expected, the US Federal Reserve raised short-term interest rates by a quarter percentage point or 0.25 per cent in its latest policy meet, that concluded Wednesday. It was the third rate hike by the US Fed this year and the eighth such move since December 2015.

Here're the key takeaways from the latest FOMC meet -

Rates move up

The Federal Open Market Committee (FOMC) increased the interest rates by 25 basis points, thus setting a new range of 2 per cent to 2.25 per cent. The move reflected an upbeat assessment of the economy that was identical to the Fed’s last policy statement eight weeks ago, despite concerns over Trump’s escalating trade war, Bloomberg reported. Growth and job gains have been “strong” and inflation remains near the central bank’s 2 per cent target, the FOMC said in its statement. Also, it has signalled one more rate hike this year and three more in 2019.

Analysts at Rabobank International said, "We would like to add that with recent data indicating that domestic momentum remains strong – the Atlanta Fed’s GDP nowcast for Q3 stood at 4.4 per cent on September 19 – it would take time for the trade war to slow US economic growth down to a pace that would concern the FOMC. Therefore, we now change our call to four hikes this year, with the next hike in December."

Fed removes reference to 'accommodative policy'

The US Fed has dropped the line from its statement that policy is "accommodative". It inserted no substitute language for the phrase, which had been a staple of its guidance for financial markets and households for much of the past decade. The wording had become less and less accurate since the central bank began increasing rates in late 2015 from a near-zero level, and its removal means the Fed now considers rates near neutral, said Reuters in its report.

"Fed’s decision to raise rates to 2.0-2.25 per cent is on expected lines; our Taylor rule models indicate that for the current set of data on US economy, the Fed rate should be at least 3.3 per cent; so the current rate is still less than neutral. There is scope for more normalisation in the next three years. Fed is guiding for one for hike in December and three more in 2019. Fed’s statement dropped the accommodative phrase, in view of the solid economy, strong household condition and tightening labor market. Overall, it supports the view of falling dollar supply; implications of EMs flows remain adverse," said Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services.

Accommodative monetary policy occurs when a central bank attempts to expand the overall money supply to boost the economy when growth is slowing. An accommodative monetary policy tends to lower interest rates, especially the short-term ones, at the time credit is made plentiful.

Growth projections

Federal Reserve sees the US economy growing at a faster-than-expected 3.1 per cent this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2 per cent target.

Inflation forecast

Inflation was forecast to hover near 2 per cent over the next three years, while the unemployment rate is expected to fall to 3.5 per cent next year and remain there through 2020 before rising slightly in 2021. The jobless rate is currently 3.9 per cent.

No dissent

For the sixth meeting in a row, no Fed officials dissented from rate hike decision as voters on the committee backed the decision 9-0. "Mr. Powell has yet to experience an FOMC dissent under his tenure. This underscores that the committee has a broad consensus around its current strategy," reported the Wall Street Journal.