The Fed raised its benchmark interest rate to a range of 1.5 percent to 1.75 percent, marking the sixth time since the financial crisis that it has raised rates.
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In a statement after its latest policy meeting, the Fed said it boosted its key short-term rate by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent.
Similarly, inflation expectations also shifted slightly.
“(Gold’s) initial reaction to the Fed was positive, but then reading through to 2019 and 2020 you see potentially a faster pace of (rate) tightening, so its like giving with one hand and taking away with the other”, ICBC Standard Bank analyst Tom Kendall said. The London Interbank Offered Rate, which is the rate at which global banks lend to each other and serves as a benchmark for lending rates, has risen for more than 30 consecutive sessions and is at its highest since the financial crisis.
Despite the rate hike, the real interest rates are still negative. This relieved the markets that expected the Fed to increase rates four times this year on the back of an improving economic outlook.
The Federal Reserve Chairman, Jerome Powell, warned that a U.S. trade war would pose a risk to the outlook for the USA economy. People were not surprised as Fed Chairman Jerome Powell had delivered a statement to Congress that implied the probability for a March rate hike.
“We believe that the Fed has not hastened its rate hikes as the USA economy and inflation look better in only the short term”, Jitipol said.
The announcement underscores the Fed’s gathering confidence in the economy as well as its focus on the potential for inflation, which has remained persistently muted throughout the expansion.
The main reason cited for an interest rate rise is stronger growth, which picked up the pace in 2017 to 2,7%, up from 2,5% originally forecasted. The US jobless rate, held at 4.1 per cent in February, is well below the Fed’s 4.5 per cent estimate of the longer-run rate of unemployment.
While the Fed is “very alert” to any increases that could result from the very low unemployment rate, which normally would be expected to drive wage increases, “it’s not something we observe at the present”.
“This gradual process has been underway for more than two years”.
“I think they will end up tightening four times this year, but they don’t have to signal that yet”, said Jim O’Sullivan, chief US economist at High Frequency Economics. “It could change up”.
“While the oil-producing countries are discussing the extension of the OPEC + agreement, which is aimed at stabilizing the market, an increase in the Fed rate will help reduce oil prices because all oil trading operations are conducted in dollars”, he said.
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“A number of participants in [the] FOMC did bring up the issue of trade”, Powell said on Wednesday, adding that participants have been approached by members of the business community who have expressed fears of more widespread retaliation.
