U.S. Fed Reserve Hikes Rates As Expected, Amidst Trade Developments

U.S. Federal Reserve

The U.S. Federal Reserve raised its short-term federal fund rate by 25 basis points to a range between 1.75 to two per cent. The central bank is indicating it expects to increase rates two more times in 2018.

Yesterday’s move was widely expected by forecasters and market reaction was mixed. For one thing, bank stocks and bond yields were up. On the other hand, big dividend stocks like real estate investment trusts were falling, likely since a higher rate will have a negative effect on their business.

This is the second rate increase this year and the seventh time since 2015. Despite this, Federal Reserve Chairman Jerome Powell said U.S. inflation is expected to tick higher this year to 2.1 per cent, above the Fed’s target of two per cent, though he also said he’s not concerned.

Following the announcement, Powell spoke to reporters about real complaints he’s received from businesses about the Trump administration’s new trade policies. Most notably, Powell said companies have talked to him about postponing their larger purchases or new hires due to the financial restrictions that came with the policies.

Despite this, Powell said these trends are not impacting the economy at the present time and that it “is in great shape.”

He admits, “You’re beginning to hear reports of companies holding off on investments and hiring people,” but “for now, we don’t see that in the numbers at all.”

Recent trade developments

Trump recently slapped tariffs on steel and aluminum imports from Canada.  He is also threatening additional tariffs on $50-billion-worth of Chinese imports, and has directed his administration to consider further duties on imported cars. Those moves have lifted steel and aluminum costs.

The latest CNBC Fed survey indicates that economists, money managers and analysts agree with the way President Donald Trump is handling the economy. The survey is non-scientific and represents the opinions of 38 of the nation’s top money managers, investment strategists, and professional economists. However, they do worry his trade policies will slow growth. These moves could slow down what has been years of remarkable economic growth and record low unemployment  in the U.S. and muddy the decision to raise rates later this year.

Increase in news conferences

Following the announcement, Powell also informed the public that starting January 2019, the U.S. central bank will increase the number of news conferences it holds each year to eight from four.

The Fed holds news conferences after its open market committee meetings in order to explain its policy decisions and outlooks on the U.S. economy. Former Fed Chairman Ben Bernanke started the practice of having four news conferences per year back in 2011.

But Powell said he doesn’t want to create the impression that policies only change after certain meetings and not others, so they’ll now hold news conferences after all eight meetings.

The next scheduled meeting is Aug. 1, 2018.

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Economic News / RSM News

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