June 22, 2018

Fed rate increases not helping consumers

24 March 2018, 01:40 | Lorenzo Hawkins

What to look for at the Federal Reserve meeting

US Fed goes for 25bps rate hike in Jerome Powell's first meeting as chair

Stern NYU professor of economics Nicholas Economides and former Richmond Fed senior economist Ward McCarthy on Federal Reserve Chairman Jerome Powell's first press conference and the market's reaction to the interest rate hike.

The Fed raised its key rate by 25 basis points to a range of 1.50 percent to 1.75 percent on Wednesday and flagged at least two more increases for the year, short of the three that some economists had been predicting.

That likely caused Fed officials to signal they expect a slightly more aggressive path for rate increases next year.

But markets later pulled back during new Fed Chair Jerome Powell's news conference in which he was asked repeatedly about risks to the economic outlook, including from a possible trade war between the United States and China. Further, a minimum of two more fiscal policy changes are slated to come prior to the end of the calendar year, per representatives of the Federal Reserve Bank.

Some analysts said that is exactly how markets would take it, given that since the Fed began raising rates in 2015, it has only done so at meetings when the Fed's leader was scheduled to speak.

The Fed forecasts the unemployment rate will be 3.8 percent in 2018 and will decrease to 3.6 percent in 2019 and 2020.

Yesterday, on Wednesday, March 21, 2018, "the Fed", as it's colloquially called, immediately raised interest rates by one-quarter percent, or 0.25%, to a new "band" - in simple terms, just a level between which interest rates fall - of 1.5% to 1.75%.

The Fed said it expects to increase rates twice more this year.

"Job gains have been strong in recent months, and the unemployment rate has stayed low", the FOMC said.

By historical standards, interest rates remain quite low.

In the time since December 2015, when Yellen approved the first interest rate increase in nearly a decade, rates on consumer loans have slowly crept up - but are still far below pre-recession levels.

The Fed raised the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.5% to 1.75%.

According to a Bloomberg report, US President Donald Trump is set to announce about $50 billion of tariffs against China over intellectual-property violations.

Hence, in its assessment of future growth prospects, the central bank increased its median forecast for US GDP to 2.7 percent (from 2.5 percent earlier) for 2018, and 2.4 percent (from 2.1 percent earlier) for 2019.

"A higher yen is seen weighing on exporters", it added. "Overall, consumer prices, as measured by the price index for personal consumption expenditures increased 1.7 percent in the 12 months ending in January", he said.

Oxford Economics chief Asia economist Louis Kuijs, said: "The key risk is that it does not end with this modest baseline scenario". The Fed tightened policy three times past year. This could have served as the trigger for a lot of foreign funds and companies to exit the country and return once the economy has stabilised. The chairman must balance out the burgeoning job market, an uptick in wages, and the Trump administration's economic stimulus package, all of which could lead to an overheating of the economy - and inflation.

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