Federal Reserve raises interest rates for the fist time in 2016, The U.S. dollar index value increase versus Euro, Pound, Yen and other foreign exchange currencies after the FOMC decision to raises interest rates for the first time in 2016, ForexSQ experts conducted the Fed decision impact on the stocks and Forex market.
FOMC Raises Interest Rates
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Federal Reserve officials raised interest rates for the first time this year and forecast a steeper path for borrowing costs in 2017, saying inflation expectations have increased “considerably” and suggesting the labor market is tightening.
The Federal Open Market Committee cited “realized and expected labor market conditions and inflation” in increasing its benchmark rate a quarter percentage point, according to a statement Wednesday following a two-day meeting in Washington. New projections show central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.
The central bank said monetary policy supports “some further strengthening in labor market conditions and a return to 2 percent inflation,” adding the word “some” in an indication that officials see less room for improvement in the job outlook. The word “strengthening” also replaced “improvement.”
Inflation has firmed toward policy makers’ 2 percent target, unemployment has dipped further and President-elect Donald Trump has pledged growth-fueling tax cuts and infrastructure spending that could warrant a faster pace of Fed tightening. Trump has accused Fed Chair Janet Yellen of keeping rates low to help Democrats, a charge she denied. Now, higher interest rates have the power to blunt the impact of any fiscal stimulus.
The FOMC didn’t include language in its post-meeting statement explicitly referring to changes in fiscal policy.
Widely Expected
Wednesday’s interest-rate increase, only the second since the central bank cut borrowing costs to near-zero in 2008, was both telegraphed by Fed officials in recent weeks and widely anticipated in financial markets, with futures traders putting the probability at 100 percent.
Yields on benchmark 10-year notes surged after Wednesday’s decision and the Dollar Spot Index reversed an earlier decline from Tuesday.
All analysts had projected a hike on Wednesday. Economists saw two rate increases in 2017, according to the average probability in a separate survey of 41 respondents conducted Dec. 8-12.
The FOMC’s decision was unanimous for the first time since July. The move brings the target for the federal funds rate — the overnight lending rate between banks — to a range of 0.5 percent to 0.75 percent. That will potentially lead to marginally higher borrowing costs for consumers and companies while giving savers a boost.
Recent information shows that “the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year,” the central bank said in its statement. Job gains have been “solid,” consumer spending is “rising moderately” and business investment “has remained soft,” the Fed said.
Fed Chair Janet Yellen will discuss the decision at a press conference scheduled for 2:30 p.m. in Washington.
Roughly Balanced
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Officials repeated that near-term risks to their outlook are “roughly balanced.”
Fed officials continue to project three quarter-point rate increases in 2018, based on median federal funds forecasts of 1.375 percent in 2017 and 2.125 percent the following year.
The Fed’s projections show little change from September in the outlooks for growth, unemployment and inflation over the next three years. Policy makers see gross domestic product growing 2.1 percent in 2017, up from a previous forecast of 2 percent.
Policy makers slightly reduced their outlook for unemployment in 2017 to a fourth-quarter level of 4.5 percent. Joblessness sank to 4.6 percent in November, a nine-year low.
The median projection for the longer-run federal funds rate increased to 3 percent, a small shift from about 2.9 percent in September. That projection had been on a downward trend.
The Fed had expected to make four quarter-point increases this year when surveying the outlook in December 2015. But its forecast was thwarted by a range of headwinds including China-spurred turmoil in financial markets and Britain’s vote to leave the European Union.
Jobs Added
Despite global risks, the domestic economy has moved closer to the Fed’s goals. In addition to the drop in unemployment, the country has added 180,000 jobs a month on average this year.
Meanwhile, inflation has steadily approached the Fed’s 2 percent goal. The central bank’s preferred index of consumer prices climbed 1.4 percent in the year through October. Core inflation, which strips out volatile fuel and food, is running at 1.7 percent.
With bond yields rising sharply since Trump’s Nov. 8 victory in anticipation of higher inflation, the Fed said Wednesday that “market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”
FOMC raises rates, Fed sees faster pace of increases in 2017
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The U.S. Federal Reserve raised interest rates by a quarter point on Wednesday and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.
The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent. Bond yields and the dollar rose after the rate decision while stocks were mixed with financials and tech the only two sectors to show gains.
“In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range,” the central bank’s policy-setting committee said in its unanimous statement after a two-day meeting.
“Job gains have been solid in recent months and the unemployment rate has declined,” the Fed said, noting that market-based measures of inflation compensation had moved up “considerably.”
More significant was a fresh batch of Fed policymaker forecasts that indicated the current once-a-year pace of rate increases will accelerate next year. Markets and the Fed appeared to be close on pricing with Fed futures markets pricing in at least two and possibly three hikes, up from one to two prior to the meeting.
With President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed’s 2 percent target.
The Fed’s median outlook for rates rose to three quarter-point increases in 2017 from two as of September. That would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run “normal” 3.0 percent.
That normal level is slightly higher from three months ago, a sign that the Fed feels the economy is still gaining traction.
“They didn’t mention the fiscal stimulus but typically their aggressiveness does indicate that there’s a little more confidence that they can get away with three hikes next year,” said Aaron Kohli, interest rate strategist at BMO Capital Markets.
The Fed continued to describe that pace as “gradual,” keeping policy still slightly loose and supporting some further improvement in the job market. It sees unemployment falling to 4.5 percent next year and remaining at that level, which is considered to be close to full employment.
Fed Chair Janet Yellen is scheduled to hold a press conference at 2:30 p.m. ET (1930 GMT) to elaborate on the decision.
President Trump Impact
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U.S. bond yields had already begun moving higher following the election and as expectations of the Fed rate increase solidified. By the start of this week, trading in fed funds futures assigned a greater than 95 percent likelihood to a rate hike, according to data compiled by the CME Group.
All 120 economists in a recent Reuters poll had expected a rate hike on Wednesday.
In the weeks following Trump’s Nov. 8 victory, Fed policymakers have said his proposals could push the economy into a higher gear in the short run. Even though the details of the Republican businessman’s plans remain uncertain, Wednesday’s statement marked a rare case in the post-crisis era in which the Fed moved its interest rate outlook higher.
Risks to the outlook remain “roughly balanced” between factors that could slow or accelerate the economy beyond what the central bank anticipates, the Fed said, no change from the November assessment.
The rate increase was the first since last December and only the second since the 2007-2009 financial crisis, when the Fed cut rates to near zero and deployed other tools such as massive bond purchases to stabilize the economy. ForexSQ use Reuters and Bloomberg as source.
