Federal Reserve Hikes Rates 25-bps at December Meeting

Stock markets and benchmark Treasury yields slid after the Fed statement and a press conference by Fed Chairman Jerome Powell that followed.

"He's trying to signal that the finish line is within sight, but we're not quite there yet", said Carl Tannenbaum, chief economist at Northern Trust, a financial services company. "We don't see that happening".

The Fed boosted its key policy rate for a fourth time this year but lowered its projections for further rate hikes from three to just two.

In a unanimous decision, the Fed delivered on what some economists called a "dovish hike", raising the target range for the federal funds rate by 0.25 point, with 2.5 percent at the high end, while providing the clearest signal to date of a cautious stance moving forward, especially as it keeps an eye on potential global risks. It marked the central bank's ninth hike since late 2015. "In turn, that supports the USA dollar, and that is negative news for emerging markets in general".

"Given the stock market declines and negative global economic news - recognised in the statement - this still points to quite a bit of confidence at the Fed in the ability of the USA economy to withstand a few more rate hikes", said Brian Coulton, chief economist at Fitch Ratings. Investors were disappointed that Fed Chairman Jerome Powell failed to indicate a more marked slowdown in the pace of rate hikes, given concerns over the state of the US economy.

Fed officials made the decision amid mounting pressure from President Donald Trump and some investors who believe the hike is likely to shrink the economic outlook for the new year. The Fed has time to alter its course if the economy slows in 2019 as much as the market fears.

Yet, Fed officials now seem more likely to only raise rates once or twice in 2019, rather than three times, as previously expected. In October, the International Monetary Fund said that the world economy is projected to expand by 3.7% next year, down from its July forecast of 3.9%.

On Wednesday, officials did cut their forecasts for economic growth in 2019 to 2.3 per cent, down from the 2.5 per cent they anticipated in September. The president has complained that the moves are threatening the economy. The increase will mean higher borrowing costs for many consumers and businesses.

The Fed has said it's "close to done" and its decisions will be data dependent, while USA equities remain "a tremendous value", Mnuchin said.

As investors adjusted to the prospect of a weaker economy and lower long-term interest rates, the dollar fell to 111.11 yen from 112.36 yen. It predicted that the economy would expand a robust 3.1 percent in 2018 before slowing to still-solid 2.5 percent in 2019.

It explained that the labor market continued to strengthen and economic activities have expanded. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low.

"The list of headwinds has been growing throughout the year", he said. CNBC stated Boeing dropped 2.5 percent, United States Steel dropped 6 percent, Citigroup and Wells Fargo each dropped more than 1.5 percent, and Target, Amazon, Nordstrom and Newell Brands eac lost more than 3 percent despite Christmas less than a week away. Indicators of longer-term inflation expectations are little changed, on balance.

Gold prices steadied on Thursday, after shedding half a percent in the previous session as the US Federal Reserve delivered a less-dovish outlook on monetary tightening than many had expected.

  • Zachary Reyes