Federal Reserve Action Leads to Another Rate Hike by a Quarter Point

Federal Reserve Action Leads to Another Rate Hike by a Quarter Point

As markets were expecting, the U.S. Federal Reserve raised its key interest rate by 25 basis points earlier this week. The quarter-point hike, that came after a two-day meeting, brings the rate to a range between 2.25 to 2.50 per cent. The is the highest the benchmark rate has been since 2008, before the global financial crisis, and the ninth time the Fed has hiked rates since it began tightening credit three years ago.

In a statement released after the announcement this past Wednesday, the Fed said the labour market is continuing to strengthen and that “economic activity has been rising at a strong rate.”

The Fed also hinted that further rate increases are likely, though they will be gradual, as job gains are strong, the unemployment rate remains low, and household spending grows. Similar sentiments of gradual rate increases in the near future were shared at the Fed’s last announcement this past November, when rates were held.

In terms of inflation, the Fed said, “On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”

Despite this positive outlook, the updated forecast is now only projecting two rate hikes next year, in comparison to the three it predicted back in September.

For U.S. consumers, this means the cost of borrowing is going up. And for Canadians, this means more pressure on the Bank of Canada (BoC) to raise rates at its next announcement on January 9. Earlier this month, the BoC held rates steady at 1.75 per cent, citing pressure from lower oil prices and emerging trade conflicts. And although it did not go into detail on the matter, the understanding is this refers to the ongoing trade war between the U.S. and China.

In a note sent to reporters after the Federal Reserve announcement. BMO Deputy Chief Economist Michael Gregory said, “It’s going to be a more nimble 2019 as far as Fed policy is concerned.” He adds, “While this dovish rate hike to end 2018 was not as dovish as markets were hoping for… it nevertheless represents a significant downshift in the Fed’s policy gear.”

This recent rate hike came despite a warning from U.S. President Donald Trump that he was not happy with the state of rising rates. Though it seems unprecedented for a sitting president to weigh in on monetary policy, as the Fed usually works autonomously, Trump went a step further and told the Washington Post last month that he was “not even a little bit happy” with the selection of Jerome Powell to chair the Federal Reserve. On Tuesday, as the Fed was meeting, Trump tweeted again about the Fed, calling the imminent hike “yet another mistake.”

Regardless, economists are confident the Fed will ignore these threats and do what is best for the U.S. economy. The Fed maintains it will pursue its mandate of managing rates to maximize employment and stabilize prices, regardless of any outside criticism.

Furthermore, journalists are in for a treat, as Chairman Jerome Powell will begin holding a news conference after each of the Fed’s eight meetings next year, rather than holding only one conference quarterly. This will allow him to explain any abrupt policy shifts, though markets watchers are concerned this increased access could jolt markets if the Fed chairman is asked or says something unexpected. Markets reacted negatively to the rate hike and most major U.S. indices were lower after the announcement.

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Economic News / RSM News

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