As expected the US Federal Reserve lifted short-term interest rates for a third time this year early Thursday morning, Sydney time and indicated there will be more to come this year and in 2019 and 2020.
The Fed’s Open Market Committee boosted its Federal Funds Rate by another quarter point to 2% to 2.25%, in the eighth increase of the current tightening cycle.
The news was expected and gold and oil prices dipped a touch while the US dollar fell, then firmed. The Aussie dollar followed suit, almost reaching 73 US cents, then dipping before recovering to trade around 72.74 US cents.
Wall Street followed a similar route, peaking just after the Fed’s decision was announced then slowly bouncing lower and dropping into the red in the final 15 minutes of the session.
US bonds lost ground as yields fell on buying support after the decision was announced. Traders liked the forecast of up to five more rate rises.
Analysts reckon there will be a 4th rate rise for 2018 at the central bank’s last meeting for the year in December. And the so-called ‘dot plot’ indicated fed members see another five increases over the next 18 months.
“The labor market has continued to strengthen … economic activity has been rising at a strong rate,” the Fed said in its statement, which removed its longstanding reference to the fact that monetary policy remained “accommodative.”
The rate rise came in the face of moaning and complaining from Donald Trump about rate rises (and he’s also whining about OPEC and higher oil prices) as well as the continuing trade war with China.
But in the post-meeting statement, the Fed made no reference to those trade worries. It gave a bullish update on the economy, which it expects to grow 3.1% this year, saying activity growth and job gains have been strong, as have spending and corporate investment.
The ‘dot plot’ – which consists of interest rate forecasts by the Fed’s policymakers was unchanged on the previous committee meeting. It showed one more rate rise this year, followed by three in 2019 and another in 2020.
The Fed’s updated quarterly forecasts show the US economy continuing at a steady pace through 2019, with gross domestic product growth seen at 2.5% next year before slowing to 2.0% in 2020 and to 1.8% in 2021, as the impact of the Trump tax cuts and government spending fade.
Inflation was forecast to remain 2% over the next three years (the Fed’s target rate), while the unemployment rate is expected to fall to 3.5% next year and remain there through 2020 before rising slightly in 2021. The jobless rate is currently 3.9%.
The final estimate of June quarter economic growth will be released tonight and is expected to show little change on the 4.2% annual growth rate in the second estimate issued in late August.
