Market opens in green post Fed rate hike

07 April, 2018, 00:45 | Author: Luis Fowler
  • NAIRU Fed projections Federal Reserve March 2013

Whether they expect three or four rate hikes this year, investment strategists agree that the USA central bank is in the process of normalizing policy, raising rates as the economy strengthens, which, according to McMillan, "has been the goal for years".

There's growing concern among economists that the GOP tax cuts and the additional boost in federal government spending could cause the USA economy to overheat, requiring the Fed to hike rates even more than three times this year.

In its quarterly forecasts, Fed officials project that the benchmark interest rate would end this year at 2.1 percent, meaning two more hikes are likely, unchanged from the December forecast, but would rise to 2.9 percent at the close of next year, implying three increases. The FOMC appears to be split between expecting four rate hikes this year and expecting only three.

It is generally true that higher rates favor savers while lower rates favor borrowers - but the Fed does not directly control the rates consumers get on their bank accounts and mortgages.

More so given recent reports that Trump would announce an increase in tariffs on Chinese imports this week and that China is already considering slapping higher tariffs on United States agricultural exports.

The FOMC raised their forecast for 2017 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2018 expectation from 2.1 percent to 2.4 percent. All eight of them voted for Wednesday's proposed raising of interest rates, in turn making the fiscal policy proposal law. Despite the stronger growth, lower unemployment rate and higher interest rate forecast, the inflation projection was the same. They saw rates at 3.4% in 2020, up from 3.1% in December, according to the median estimate.

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Americans should anticipate even speedier extension and lesser unemployment subsequently Fed officials said.

The better news is that these strong improvements in overall growth and the labour market would bring only a gentle lift in United States inflation to slightly above the Fed's 2.0% inflation target. Yellen gave the Feds a reality-check during her three years as chairman.

Lael Brainard, a Fed governor who has been less hawkish than many of her colleagues, said in a speech this month that in many ways, "today is the mirror image of the environment we confronted a couple of years ago". Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth. Markets have been rattled in recent weeks by Trump's tariff plans and embrace of a potential trade war. The jobless rate is expected to trough at just 3.6 percent next year, as compared with the earlier 3.9 percent.

A weaker dollar and strong job creation is also forecast to drive growth.

YDSTIE: For now, Powell said, he does not see any sign inflation is accelerating.

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