Fed hikes interest rates, slows future tightening path

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Europe

The U.S. Federal Reserve raised interest rates on Wednesday and said it was keeping the core of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases next year.

After weeks of market volatility and calls by President Donald Trump to stop increasing borrowing costs, the Fed lifted rates by a quarter of a percentage point. Fed Chairman Jerome Powell also said the central bank would continue drawing down the size of its balance sheet by 50 billion U.S. dollars each month.

The rate increase, the fourth of the year, was expected, but Powell's comments on the balance sheet in a news conference, though a repetition of longstanding Fed policy, prompted a sell-off on equity markets.

Following the Fed rate hike, China left its short-term borrowing rates unchanged, according to a statement by the People's Bank of China on Thursday morning.

Unlike the U.S. Fed, the Chinese authorities have injected liquidity by cutting reserve ratio requirements (RRRs) four times this year, as well as eased restrictions on lending and financing.

With the Fed set to slow the pace of further rate hikes in 2019, that should give China more room to maneuver with its own monetary policies. China Daily reported last month that policymakers would regard keeping the yuan stable as a key target of monetary policy.

The Chinese currency is approaching an exchange rate of 7.0 against the U.S. dollar, which is an important “psychological” level, according to Xinhua.

File photo of Federal Reserve Board Governor Jerome Powell discussing financial regulation in Washington, U.S., October 3, 2017 /Reuters Photo

Emerging market indices fell after the Fed announced its latest hike, as concerns grow about the outlook for 2019 amid slowing global growth and pressure from the U.S. dollar on currencies like Argentina's peso, the Turkish lira and the Indian rupee.

The S&P 500 index was down about 1.6 percent in late afternoon trading. Bond prices rallied and the dollar, weaker on the day before the decision, regained some ground against most major currencies.

By diminishing its bond market holdings each month, the Fed puts further upward pressure on interest rates, something Trump explicitly requested them to stop this week.

“I think the run-off of the balance sheet has been smooth and has served its purpose, and I don't see us changing that,” Powell told reporters after the Fed raised its federal funds rate to a range of between 2.25 percent to 2.50 percent.

The central bank did bow to rising uncertainty about global economic growth, and expectations the U.S. economy will slow next year, with fresh economic forecasts showing officials at the median now see only two more rate hikes next year compared to the three projected in September.

It noted that “some” further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs.

But another message was clear in the policy statement issued after the Fed's last meeting of the year and Powell's comments: The U.S. economy continues to perform well and no longer needs the Fed's support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.

In its statement, the Fed said risks to the economy were “roughly balanced” but that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

Source(s): Reuters