Overseas Market Report
The US Federal Reserve has raised interest rates and said it was keeping the core of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases next year.
After weeks of market volatility and calls by President Donald Trump to stop increasing borrowing costs, the Fed on Wednesday lifted rates by a quarter of a percentage point. Fed Chairman Jerome Powell also said the central bank would continue drawing down the size of its balance sheet by $US50 billion each month.
The rate increase, the fourth of the year, was expected, but Powell’s comments on the balance sheet in a news conference, though a repetition of longstanding Fed policy, prompted a sell-off on equity markets. The S&P 500 index was down about 1.6 per cent in late afternoon trading. Bond prices rallied and the dollar, weaker on the day before the decision, regained some ground against most major currencies.
By diminishing its bond market holdings each month, the Fed puts further upward pressure on interest rates, something Trump explicitly requested them this week to stop. “I think the run-off of the balance sheet has been smooth and has served its purpose, and I don’t see us changing that,” Powell told reporters after the Fed raised its federal funds rate to a range of between 2.25 per cent to 2.50 per cent.
The central bank did bow to rising uncertainty about global economic growth, and expectations the US economy will slow next year, with fresh economic forecasts showing officials at the median now see only two more rate hikes next year compared to the three projected in September. It noted that “some” further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs.
But another message was clear in the policy statement issued after the Fed’s last meeting of the year and Powell’s comments: The US economy continues to perform well and no longer needs the Fed’s support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.
Morning-Market-Note-Thursday-20th-December