Domenica, 17 Dicembre, 2017

US Federal Reserve raises interest rates

FOMC to hike US interest rates today Fed raises interest rates again in further sign of confidence in US economy
Sveva Terracina | 19 Giugno, 2017, 02:40

The latest Fed rate hike, announced in a statement after a policy meeting, comes as the U.S. economy is growing only sluggishly.

"The committee now expects to begin implementing a balance sheet normalization programme this year, provided that the economy evolves broadly as anticipated", the Fed said in its statement.

As I've said before, the Fed needs to get rates back to normal - and they are not anywhere near there yet.

Kully Samra, UK managing director at Charles Schwab: "An interest rate rise today was highly expected and shows the Fed continues to be confident in moving towards normalizing monetary policy".

The PCE index dropped to an annualised rate of 1.7 per cent in April while the core measure - the Fed's preferred gauge which strips out volatile food and energy prices - fell back to 1.5 per cent, an even weaker reading than the same time a year earlier.

They forecast US economic growth of 2.2 percent in 2017, an increase from the previous projection in March.

Even the increase that began in late 2016 had little to do with the Fed.

For one thing, the stock market rallied on the news, sending the major indexes to record levels. Eastern time. The Dow Jones industrial average dipped 3 points to 21,325.

Wall street's reaction was muted, with no big moves among stocks or bonds. US interest rates and the impact on Canadian mortgages are no exception. "That's worrisome in the sense that consumers already have very stretched household budgets, and they'll be stretched further as rates rise and interest charges increase". Even the five-year yield is lower, at 1.73% now, compared with 1.75% on the day of the first hike.

The Nikkei 225 slipped by 0.3%, with the ASX 200, Kospi and Hang Seng all down.

Now, within the space of six months, we've had two more rate hikes.

That's not what is happening in the real world, where vehicle sales have slowed and retailers are going under in record numbers.


"The Fed seems to think the weakness is temporary".

In commodities, oil prices fell more than 1 percent, on the backfoot again on worries about USA oversupply.

It didn't bust out of the gate in the second quarter either, although there are mixed opinions as to just how much it is growing.

Markets in Asia are also cautiously waiting whether China's central bank will follow the Fed with another round of money market rate increases (like it did in March 2017). HEADING LOWER Remember too, that one key difference since last the Fed hiked in March is that there is now much less confidence in the Trump administration's ability to carry out either meaningful stimulative spending or midwifing a tax cut package which would do more than pump up equity prices.

Vast changes in the structure of the USA economy are reflected in the changed relationship between inflation and the unemployment level.

Bond yields hit their lowest level of 2017.

Inflation has been more problematic, having long stayed below the central bank's 2 per cent target rate. Higher inflation is a tried-and-true indication that the economy is getting healthy. Let's take a look at the FOMC statement for future clues.

The most abnormal part of the Fed's outlook was related to the labor market.

That's technically true, but job growth has been weaker than expected and less than desired over the past few months.

However, this implied "dot plot" liftoff path is not priced in to markets, which expect a fed funds rate of only 1.5% by year-end 2018. Many more jobs are necessary to take care of those who are out of work and looking. Better growth overseas also raised optimism.

Q. Why haven't mortgage rates increased? But Wall Street is attuned to signs of weaker economic growth, and the combination of sluggish growth and high interest rates, which slow the economy down, may have anxious investors.

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