Wednesday, December 19, 2018

U.S. Fed raises rate 25 bps, cuts 2019 hikes to 2 from 3

     The U.S. Federal Reserve raised its benchmark federal funds rate by another 25 basis points to 2.25 - 2.50 percent but lowered its forecast for the number of rate hikes in 2019 to two from three due to slower economic growth in what many analysts would consider a "dovish rate hike."
     The Federal Open Market Committee (FOMC), the Fed's policy-making body, largely reiterated last month's view that the labour market had continued to strengthen, that economic activity has been rising "at a strong rate," that household spending has continued to grow strongly while business investment has moderated from a rapid pace earlier in the year.
     However, the Fed is clearly becoming concerned about weaker global growth, adding it is monitoring global and financial developments for their impact on the U.S. economy while it still considers the overall risks to its economic outlook as balanced.
      In judging the timing and size of future changes to its key interest rate, the FOMC also added it is now taking into account "financial and international developments" along with its usual readings of labour market conditions, inflationary pressure and expectations.
      Reflecting a lowering of the rate path in coming years, the FOMC made a subtle shift to its statement about the need for further hikes, adding the word "some" to its earlier statement of "further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity."
      It is the Fed's fourth rate hike this year - it has raised it by 100 basis points - and the 9th rate hike since it began tightening its policy in December 2015. Since then the rate has been raised by 2.25 percentage points.
      In an update to its economic projections, the Fed cut its forecast for the federal funds rate to average 2.9 percent in 2019 from September's projection of 3.1 percent, implying two rate hikes next year instead of three.
      For 2020 the Fed expects to raise its rate one more time - the fed funds rate is seen averaging 3.1 percent instead of 3.4 percent - and then remain unchanged in 2021.
      Illustrating this lower rate path, the Fed now sees the longer-run federal funds rate - which approximates a neutral rate - averaging 2.8 percent compared with 3.0 percent forecast in September.
      Mirroring a weakening of economic momentum in the fourth quarter, the Fed trimmed its forecast for 2018 economic growth to average 3.0 percent, down from September's 3.1 percent.
     For 2019 the Fed expects economic growth to decelerate further to 2.3 percent, down from a previous forecast of 2.5 percent.
     In 2020 the economy is seen expanding 2.0 percent and in 2021 by 1.8 percent, unchanged from the September forecast, while it raised the longer run growth rate to 1.9 percent from 1.8 percent.
     U.S. gross domestic product grew by a year-on-year rate of 3.0 percent in the third quarter of this year, up from 2.9 percent in the second quarter while consumer price inflation dropped to 2.2 percent in November from 2.5 percent in October.

     The Board of Governors of the Federal Reserve System issued the following statement:

"Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles."


Post a Comment