U.S. rate hike in the cards as Fed holds policy meeting

BP_Federal

We expect market action to be reserved as we await the Fed decision which will be announced at 2 PM Eastern standard time on Wednesday.

As a presidential candidate, Trump denounced the Fed's promotion of low rates as creating a "big, fat, juicy bubble", saying that then-Fed Chair Janet Yellen should be "ashamed" of wanting to bolster the Obama administration's legacy. "I'm not happy about that", Trump said in a press conference.

However, the closely scrutinized statement from the rate-setting Federal Open Market Committee removed a longstanding phrase which described the Fed's rate stance as providing stimulus to the economy.

"It's a particularly bright moment. for the USA economy", Fed Chairman Jerome Powell told reporters. Many economists touted August's 2.7 percent year-over-year wage growth as the fastest in almost a decade. Those show that the Fed's policymakers think it will raise rates five more times by the end of 2020, which bring rates up to a range of 3.25 to 4.25 percent. The Fed had signalled well in advance that it would lift the federal funds rate two more time before the end of the year and its more recent statements have pointed to three of its now regular 25 basis point increases in 2019 (although the market has been pricing in only two).

The voting FOMC members will release a new projection for where they see rates over the next two years and in the long run, known as the dot plot.

Interest rate hikes have sped up under Chairman Jerome Powell in response to a robust economy, which will help curb inflation. Korea's capital market has stayed relatively stable even after the Fed's rate hike in March that made the US rate higher than Korea's for the first time in a decade, but the capital market risk is growing.

If the central bank waits too long to head off inflation by raising rates, she explains, it could mean having to do more drastic rate hikes down the road. The Fed raises rates to keep inflation in check.

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"Are they seeing more fiscal policy showing through to aggregate demand than they thought?" said William English, a professor at Yale and former director of the Fed's Division of Monetary Affairs.

This is Fed's third rate rise this year and the eighth increase since 2015. "I'd rather pay down debt or do other things, create more jobs, so I'm anxious about the fact that they seem to like raising interest rates".

The Fed could fine-tune, or reverse, its rates strategy and/or its balance sheet strategy if the United States were suffer a significant slowdown or an implosion in its financial markets - markets priced as if the Trump-inflated growth rate can be sustained indefinitely.

Wednesday's rate rise "yet again demonstrates the Fed's faith that it can continue to raise rates gradually without slowing economic growth", said Kully Samra, UK managing director of Charles Schwab. They say the Fed's position is particularly perilous, given other risks to the economy, including shifting trade policy. That would put the benchmark overnight lending rate at 3.4 percent, roughly half a percentage point above the Fed's estimated "neutral" rate of interest, at which rates neither stimulate nor restrict the economy.

Earlier, Powell said during his news conference that such outside criticism would have no effect on the Fed's use of rates to try to maximize employment and stabilize prices. Hong Kong has adjusted its base interest rate to match the move, and other Asian economies which have their currencies pegged to the dollar may soon follow suit.

This gives it more room to diverge from USA policy if it believes domestic economic conditions warrant that. "It's a risk. You could see prices moving up".

In the three months since the Fed last raised rates, there have been reports of strong jobs numbers, bullish markets, blockbuster growth in GDP, a rock-bottom unemployment rate and sky-high consumer confidence.

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