US FED HIKES RATES; PENCILS THREE INCREASES IN 2018

about 2 years ago
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By Ruma Dubey

Jerome Powell, the new chairman of the Federal Reserve held center stage. His first interest rate decision as Fed Chairman and first news conference came at a difficult time what with Trump triggering off a tariff war.

The minutes of the Fed meet of January clearly showed that the Fed was confident about the growing US economy and sent out the signals that interest rates could go up faster than expected. And it was widely expected that Powell could mark his “first” meet with a 0.25% interest rate hike. Yes, he did that absolutely! The central bank's policy-making arm lifted the fed funds rate to a range of 1.5% to 1.75%. The sixth rate hike now since 2015.

All eyes and ears were also peeled to know whether he signaled three rates hikes this year, as was the trajectory drawn by Yellen or would he raise it to four, post the changing circumstances now?  And Powell stuck to the three rate hikes in 2018 and decided to wait until next year to take a more aggressive approach. By the end of 2019, the Fed expects its benchmark rate to hit 2.9% vs. a prior 2.7%.

On the economy front, the Fed expects it to grow even faster than previously estimated. It left the inflation forecasts unchanged at 1.9% in 2018 and 2% in 2019.

Thus the bottomline of this first Fed meet of Powell – interest rates were hiked alright but the stance is not hawkish. The Fed will continue to hike rates in a paced manner through 2019 as economy strengthens and unemployment goes down to around 3.6% and inflation drifts up beyond 2%.

Highlights of the policy:

  • Raised he target range for the federal funds rate to 1-1/2 to 1-3/4 percent.
  • The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
  • The Fed expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.
  • Forecast for the long-run sustainable growth rate of the economy was unchanged at 1.8%.
  • Job gains have been strong in recent months, and the unemployment rate has stayed low.
  • Near-term risks to the economic outlook appear roughly balanced.

For us in the Indian markets, this is over and done with. For us each day will be a new day as 31st March, the fiscal year end approaches. Thus Fed or no Fed, till the end of the month, traders will sell as the overall mood remains weak, globally and domestically too. Also the 10% capital gains tax kicks in from 1st April – that does remain a big factor as the FY18 fiscal ends.

So now the event to look out for would be 5th April, when RBI will announce its interest rate decision, which in all likelihood will be a status quo.

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