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US Federal Reserve raises interest rates but lowers forecasts for future hikes

 The 'dot plot' forecasts from committee members pointed to two further quarter point hikes in 2019, down from three previously

Ben Chu
Economics Editor
Wednesday 19 December 2018 21:15 GMT
Federal Reserve chair Jerome Powell
Federal Reserve chair Jerome Powell (AP)

America’s central bank raised interest rates on Wednesday, but also struck a more cautious note about the state of the US economy in 2019.

The Federal Reserve’s rate-setting committee voted unanimously to lift its main policy rate a quarter point to 2.25-2.5 per cent, as expected by financial markets.

But the Fed noted turbulence in stock markets, saying in a statement that it will “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

It said that it “judges that some further gradual increases” in rates will be needed to head off inflation, seen as moderation of previous language on the likelihood of hikes.

And the “dot plot” forecasts from committee members pointed to two further quarter point hikes in 2019, down from three previously.

“Not surprisingly, the underlying tone to the accompanying statement and the updated forecasts was decidedly dovish, essentially mirroring the cautiously optimistic rhetoric from Federal Reserve officials over the last several weeks,” said Candice Bangsund of Fiera Capital.

The Fed, led by Jerome Powell, earlier this week came under pressure from Donald Trump over its rate hikes, with the President tweeting that another hike would be a “mistake”.

Some analysts echoed that sentiment.

“I think the Fed missed the significance around the tightening of financial conditions beyond their activity,” said Bob Baur of Principal Global Investors.

The stock market is down, credit spreads are way up, bank stocks are plunging and the dollar is stronger. I think markets would have applauded the Fed signalling a pause next year to see how markets have been adjusting to their previous rate decisions.”

Many in US financial markets are concerned by the US bond yield curve, which is close to “inverting”, where two-year yields rise above ten-year yields. This has, in the past, foreshadowed a recession.

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