As expected the US Federal reserve lifted its key interest rate – its first rate rise under new chair Jay Powell by 0.25% to 1.50% to $1.75%, sending Wall Street higher.
There was no dissent from the decision, but more important was the outlook – three rate rises in total for this year, and a total of 8 by 2020, indicating a Federal Funds rate of 3.40% in two and a half years time. That means there will be two rate rises over the rest of 2018.
With the Reserve Bank of NZ sitting on rates, the Fed’s key rate is now higher than Australia’s 1.50% cash rate and matches the NZ official cash rate of 1.75%.
The Fed stuck to its December forecast of three rate hikes this year, meaning two more this year, not four as some analysts had forecast. It was the sixth quarter point move since December 2015.
The the ‘dot plot’ – a graphic representation of where the Fed members see rates moving to over the next year or so – suggests an extra rate rise next year and the 3.4% mid point in 2020 is higher (one rate hike in fact) than the previous estimate of 3.1% at the December meeting under former chair Janet Yellen.
That seemed to reflect the greater optimism at the Fed about the outlook.
“The economic outlook has strengthened in recent months," the Fed said in a statement following its latest two-day meeting. “The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labour market conditions will remain strong,” The Fed said.
The Fed also noted that household and business fixed investment “have moderated from their strong fourth-quarter readings”
The Fed lifted up its estimate of the long run neutral interest rates to 2.9% from 2.8% in December. That is the rate that is neither boosting nor tightening economic conditions. The increase represents that uplift in optimism.
After rising after the decision to be up 200 points, the Dow led other indices lower and they closed in the red. The overnight ASX futures indicated a 15 point gain just after the Fed’s announcement, but by 7 am was showing a fall of a point when trading re-opens this morning.
The US dollar lost ground, so gold rose after the decision, settling at $US1,321.50 an ounce in New York, but rose another $US20 an ounce in after hours trading. US oil futures jumped 2.6% to past $65 a barrel, the highest for a month, and then moved higher in electronic trading.
The Aussie dollar rose, US bond yields edged higher with the 10 year benchmark security seeing its rate top 2.92%, and then retreated back to around 2.88% in late trading as investors realised the Fed wasn’t as aggressive as first thought.
In its updated forecasts, the Fed said the US economy had been expanding at a “moderate” rate and noted a slowdown in household and business investment. Early estimates of growth in the current March quarter point to a slowing to 1.8% rate from the 2.5% annual pace reported for the December quarter of 2017.
But this is expected to be a brief slowing. The Fed’s forecast for 2018 is 2.7%, compared with 2.5 per cent in its December outlook, and 2.4% next year compared with 2.1% previously. The 2019 rate though will be no better than the actual 2.4% experienced in 2017.
The Fed’s deliberations have been clouded by persistently weak inflation which has not risen to or above the Fed’s 2% target (as indicated by the Fed’s preferred measure) for more than five years.
But the Fed’s statement optimistically predicted that the 12-month rate of price growth will “move up in the coming months” before stabilising around the 2% target in the medium term.
