Fed raises interest rates, keeps 2018 policy outlook unchanged

Jon Howard
December 17, 2017

The expected fiscal stimulus, coming on the heels of a flurry of relatively bullish data, cleared the way for the U.S. central bank to raise rates by a quarter of a percentage point to a range of 1.25 per cent to 1.50 per cent.

Some market participants had been speculating that the Fed could raise its interest rate projection for next year to four rate hikes, said Stephen Innes, head of trading in Asia-Pacific for Oanda in Singapore. The fed funds rate influences a variety of other rates that consumers and businesses pay throughout the economy. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Two Fed board members, Charles Evans and Neel Kashkari, voted to leave rates unchanged.

Despite concerns from Democrats about the bank regulatory views of Federal Reserve Board officials who will lead the central bank following the departure of Janet Yellen, the current Fed chair said Wednesday that she is not anxious.

Yellen's comments, which were delivered in what is nearly certainly her final press conference as Fed chair before her term expires in February, come as some Senate Democrats have assailed Powell and President Trump's recently installed vice chair of supervision, Randal Quarles, as insufficiently tough on Wall Street banks and questioned their dedication to ensuring that financial firms do not pose a risk to the financial system. Yet no one can know for sure how his leadership or rate policy might depart from hers. This is her final news conference as Fed chair, though she will preside over one more meeting in late January. But Yellen's replacement, Jerome Powell, signed up to the hike, continuing an unbroken record of voting with the Fed chair.

Most analysts have said they think the still-strengthening USA economy will lead the Fed to raise rates three more times next year.

IG market strategist Pan Jingyi said the weak inflation is fuelling market doubt over the Fed's ability to hike rates that much in 2018.

Despite claims by the Trump administration that the cuts, which most analyses view as skewed toward corporations and wealthy individuals, will boost growth, the Fed predicts that economic growth will benefit only marginally, if at all, from the tax cut plan. Analysts pored through the Fed's statement for more clues on its thinking that could hint at its future decisions.

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The Fed cut it to the near-zero level in December 2008 and kept it there for seven years in an effort to keep the economy on track after the financial crisis and ensuing recession. Trump and many Republicans argue that those regulations are too burdensome, especially for smaller banks.

"Nonetheless, the trend of rising interest rates is unlikely to be reversed in the coming years and, as such, mortgage servicing burden is expected to grow at the margin".

The rate hike sent regional markets down yesterday and the United States dollar weakened, but reaction was largely muted. That's what the Fed considers healthy for the economy.

The brightening worldwide picture is encouraging more hiring in the United States, even among manufacturers, which have been hurt in the past by global competition.

The announcement explains that jobs gains are solid, unemployment rates have further declined, household spending is expanding and business investment is up.

Over the past six months, economic growth has exceeded an annual rate of 3 percent, the first time that's happened since 2014. US companies in the S&P index derive about half their revenue from overseas.

But inflation is projected to remain shy of the central bank's goal for another year, with weakness on that front still enough of a concern that policymakers saw no reason to accelerate the expected pace of rate increases.

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