Yahoo Finance Fed Hikes Rates, Dollar Pops, Yields Drop; US Stocks Open Higher
As widely expected, the Federal Reserve raised rates at Wednesday’s meeting by 0.25%, with federal funds now at 2.25%. It has been an eight-rate hike since the central bank started to tighten monetary policy in 2015. The Fed also maintained the current pace of quantitative tightening, which includes the selling of bonds from its balance sheet, with a monthly amount of 40-50 billion USD. All this had been expected and therefore priced in.
Market participants, therefore, paid more attention to the new economic and inflation projections and to the so-called dot plot.
The near-term dots remain unchanged, except for the longer-run dot, which rose from 2.875% to 3.000%. The new Fed vice chair, Richard Clarida, may place the dot at 3.375% for the next year, which is above the 3.125% median. He may place the dot in 2020 at 3.625%, also above the 3.375% median. This could suggest Mr. Clarida is more hawkish than the median FOMC member.
Regarding the economic projections, the GDP forecast for this year was upgraded notably to 3.1% from 2.8% in June. For 2019, the estimate has also been upgraded marginally, from 2.4% to 2.5%.
Inflation expectations show that the Fed anticipates inflation above the 2.0% target for the next couple of years, suggesting the current pace of tightening could continue well into 2019, or possibly 2020.
Another major change on Wednesday was the removal of the sentence on maintaining “accommodative” policy. This suggests that the Fed might be closer to a neutral policy rate setting, which might lead to the Fed pausing rate hikes when the “neutral rate” will be reached. However, the dot-plot does not support this theory for 2019. Seven FOMC members favor 2 hikes or fewer, 4 favors 3 hikes, and 5 favors 4 or more.
The greenback strengthened after this meeting and continued to trade stronger on Thursday as well, while bond yields dropped after the initial reaction but managed to retrace some of the losses. Stock markets declined, but dip buyers re-emerged and the SP500 index managed to also eliminate losses. US dollar index gained 0.51% at the time of writing.
Overall, it was not a game-changing meeting, but it confirmed that the Fed is poised to raise rates further, despite the recent trade war jitters.
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This article was written by Peter Bukov, one of TeleTrade’s leading analysts.
This article was originally posted on FX Empire
