Fed raises lending rate, signals slower pace

22 December, 2018, 10:27 | Author: Corey Lynch
  • Fed Chief Jerome Powell

United Kingdom shares on Thursday fell to their lowest in more than two years after the US Federal Reserve bank raised interest rates for the fourth time this year, sending global stocks spiralling down.

In a unanimous decision, the Fed delivered on what some economists called a "dovish hike", raising the target range for the federal funds rate by 0.25 point, with 2.5 percent at the high end, while providing the clearest signal to date of a cautious stance moving forward, especially as it keeps an eye on potential worldwide risks.

The more tentative approach was evident in new projections by Fed policymakers.

Despite the forecast for fewer hikes, investors sent stocks plunging once Chairman Jerome Powell began a news conference, apparently disappointed that Powell didn't go further to signal a slowdown in rate increases.

However, they reduced the number of rate hikes they foresee next year, to two from three, a sign that they may halt their monetary tightening campaign.

On news of the latest increase, stocks that had been up earlier in the day turned sharply lower, ending down 352 points, or 1.5%.

The Dow Jones Industrial Average sank 233 points, or 1 percent, to 22,626.

The market is swooning even as the USA economy is on track to expand at the fastest pace in 13 years. It was a day of mixed messages that failed to ease investor concern that the central bank is making a policy mistake.

That signaled that after this latest move, the Fed could hold off raising rates in March or even later.

Yet the US central bank mostly rebuffed investors' growing worries about recession and raised rates on December 19 for a fourth time this year. The so-called federal funds rate now stands at a range between 2.25 percent and 2.5 percent. "The bottom line is market participants are more concerned about the economic outlook than the Fed is".

"I think from this point forward, we're going to be letting the data speak to us", Powell told reporters.

"Economic activity has been rising at a strong rate", the Fed said in a statement, adding that "some further gradual increases" in rates are likely needed. If real GDP continues to grow above the Fed's current estimates of potential without generating an acceleration in inflation, if productivity growth continues to improve, and if the labor force participation rate for the prime working-age cohort continues to rise, the Fed will eventually further revise up its estimates of longer-run growth.

In recent years, the Fed has managed to telegraph its actions weeks in advance to prepare the financial markets for any shift.

Banks and consumer discretionary stocks were the biggest drag on the market fro most of the session, with ANZ, NAB and Westpac all down more than one per cent. "Instead, it made a decision to continue trying to win the game", economist Joel Naroff said.

It could make 2019 a hard year for the Fed, and Powell seemed to acknowledge as much in a post-policy-meeting press conference on Wednesday as he tried to fit the square peg of a potentially weaker outlook into the round hole of stricter policy.

Fed officials also revised down their forecast for USA economic growth in 2019 to 2.3 percent from 2.5 percent previously estimated. Most private economists agree with that assessment, in part because stimulus from this year's tax cuts is set to fade.

For Powell, the economic outlook has become hazier as, in his words, "cross-currents" have emerged.

Smaller company stocks have been crushed during the recent market slump because slower growth in the USA will have an outsize effect on their profits.

By most accounts, the US economy remains solid, but financial conditions have tightened and there are signs of a weakening housing sector.

Tokyo led a rout of Asian shares Thursday, mirroring big losses on Wall Street after the Fed defied unprecedented pressure from Donald Trump and raised interest rates, sparking fears the move could choke economic growth.



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