Defying pressure from the US President Donald Trump to pause rate hikes, the US Federal Reserve raised interest rates by a quarter-point on Wednesday, thus taking the target range for its benchmark funds rate to 2.25 per cent to 2.5 per cent. The move marked the fourth increase this year and the ninth since it began normalising rates in December 2015.
Although this rate hike was widely expected, Fed Chair Jerome Powell's comments that the central bank would continue to reduce the size of its balance sheet at the current pace and it will keep hiking rates if data justified, spooked investors triggering a sell-off in the US equities.
Keeping in view the correction in the stock market and fear of economic slowdown, there was hope for it to be slightly more accommodative. However, Powell’s comments that “policy does not currently need to be restrictive” has been interpreted that the Fed is not looking at an immediate pause, The Guardian reported quoting an expert as saying.
There were no dissents in the Fed’s policy decision.
Here's a look at the top highlights from the US Fed's last policy decision of 2018 -
Rate hike forecast trimmed
The Federal Open Market Committee (FOMC) members now project two rate hikes in 2019 from an earlier forecast of three, which is a reduction but still ahead of current market pricing of no additional moves next year. By trimming the number of rate hikes they foresee in 2019, to two from three, policy makers signaled they may soon pause their monetary tightening campaign. Officials had a median projection of one move in 2020, Bloomberg reported.
Language not entirely dovish
The language in the post-meeting statement was not entirely dovish, or easy on its outlook for rates. The committee continued to include a statement that more rate hikes would be appropriate, though it did soften the tone a bit, reports CNBC."The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 per cent objective over the medium term," the statement said.
Fed to continue trimming balance sheet
In a presser following the policy announcement, Fed Chairman Jerome Powell said the central bank would continue trimming its balance sheet by $50 billion each month and left open the possibility that continued strong data could force it to raise rates to the point where they start to throttle the economy’s momentum.
On economic growth
While the market is worried that the US might be infected by a global slowdown, the FOMC statement showed little concern. Officials continued to describe economic growth as "rising at a strong rate" and left descriptions of other parts of economic activity unchanged as well. In Powell's words, The US economy continues to perform well and no longer needs the Fed’s support either through lower-than-normal interest rates or by maintaining of a massive balance sheet. The policy does not need to be accommodative."
Gross domestic product is forecast to grow 2.3 per cent next year and 2.0 per cent in 2020, slightly weaker than the Fed previously anticipated. The unemployment rate, currently at a 49-year low of 3.7 per cent, is expected to fall to 3.5 per cent next year and rise slightly in 2020 and 2021. Inflation, which hit the central bank’s 2 per cent target this year, is expected to be 1.9 per cent next year, a bit lower than the 2.0 per cent forecast three months ago, Reuters reported.