FED HIKES RATES, TWO MORE TO COME IN 2018

about 9 months ago
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By Ruma Dubey

Powell began his Press Conference using plain English, saying, “The economy is doing very well. Most people who want to find jobs are finding them, and unemployment and inflation are low."

That in a nutshell was what the Monetary Policy was about.

It was a foregone conclusion that the Fed would rate the hike tonight by 0.25% the only suspense was about the number of rate hikes for the rest of 2018 – would it be two, more, three or even four?

And the Fed, along with a 0.25% rate hike, signaled a much faster pace this year to keep the US economy chugging on the good track which it is right now. The Fed median estimate has gone up to four rate hikes this year – two have already happened so there will be two more before 2018 ends.

That’s not all – the Fed had another rate hike through an unconventional amount to keep the fed-funds rate from drifting too high. The fed hiked the IOER rates by 20 bps to 1.95%, effective immediately. This is the interest it pays private banks on reserves they park overnight at the central bank.

The FOMC largely maintained its accommodative stance – the same thing it has been saying for so long now.

The Monetary Policy highlights:

  • The Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent.
  • The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
  • 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.
  • Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.
  • Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.
  • On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
  • There will be a Press Conference from January after every FOMC monetary policy meet.
  • No changes are planned to the Fed's balance-sheet rolloff program

With Fed getting closer to normalizing its monetary policy, the dollar will only get stronger and this makes all dollar denominated debts more expensive while at the same time, higher US interest rates mean it will encourage US investors to pull back money from emerging markets and invest it back in USA.

For the Indian markets, the RBI rate hike last week was a preemptive action as it expected this rate hike and was more about allowing foreign investors keep their arbitrage advantage thus preventing major capital outflows, which in turn could have led to further rupee weakening.

The equity markets too have largely discounted this news and it is not expected to bring the market tearing down into shambles. Yes, signal of four rate hikes would have some impact but we should thank the RBI for being proactive or else, we could have seen large capital outflows; we will see that in the coming days but it will be not be a complete selloff. And of course we now have the mutual funds to minimize that impact!

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