The U.S central bank has stuck to its plan to keep withdrawing support from an economy it views as strong by again increasing interest rates, despite weeks of market volatility and calls from the President for the Federal Reserve to stop raising interest rates.
The Fed has signalled “some further gradual” rate hikes and no break from cutting its massive bond portfolio with U.S. stocks and bond yields falling hard. Traders are worried that policymakers could restrict economic growth.
The latest rate increase, also the fourth for the year 2018, pushed the central bank’s key overnight lending rate to a range of 2.25 per cent to 2.50 per cent.
“Maybe they have already committed their policy error,” said Fritz Folts, chief investment strategist at 3Edge Asset Management. “We would be in the camp that they have already raised rates too much.”
In a news conference after the release of the policy statement, Fed Chairman Jerome Powell bowed to what he called recent “softening” in global growth, tighter financial conditions, and expectations the U.S. economy will slow next year, and said that with inflation expected to remain a touch below the Fed’s 2 per cent target next year, policymakers can be “patient.”
Fresh economic forecasts show that officials now see only two more rate hikes for 2019 compared to the three projected in September.
But another message was clear in Powell’s comments: The U.S. 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.
“Policy does not need to be accommodative,” he said.
“There would be circumstances in which it would be appropriate for us to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so.”
In its statement, the Fed said risks to the economy were “roughly balanced” but that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
The Fed also made a widely expected technical adjustment to keep rates within the targeted range by raising the rate it pays on banks’ excess reserves by just 20 basis points which also gives better control over the policy rate.
This decision to again raise borrowing costs is likely to irk President Trump, who has repeatedly attacked the bank’s tightening this year as damaging to the economy. The Fed has been raising rates to reduce the boost that monetary policy gives to the economy, which is growing faster than a sustainable rate, according to central bank policymakers.
“I think that markets were looking for more in terms of the pause,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.
“It’s not as dovish as expected, but I do believe the Fed will ultimately back off even further as we move into the new year.”
SPX tumbled to a 15-month low, extending a streak of volatility that has dogged the market since late September (down nearly 15 per cent from its record high).
Benchmark 10-year Treasury yields US10YT=RR fell as low as 2.75 per cent, the lowest since April 4.
Gross domestic product is forecast to grow 2.3 per cent this year and 2.0 per cent in 2020, slightly weaker than previously anticipated by the Fed. The unemployment rate, currently at 3.7 per cent – a 49-year low, is expected to fall to 3.5 per cent next year and raise 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, a bit lower than the 2.0 per cent forecast three months ago.
There were no differences in the Fed’s policy decision.