Fed moves to prevent USA economy from overheating
- Author: Kelly Blake Mar 24, 2018,
Mar 24, 2018, 13:41
Although returns on United States dollar assets will rise, markets viewed this rate increase as expected and the United States dollar weakened on market disappointment over the likelihood there would not be a faster pace of monetary tightening this year.
But consider that approximately $62.50 a year has already been added as a result of the Fed's five rate hikes since late 2015, and interest payments may be up by $100 at the end of the year.
The Federal Reserve said the 0.25% change was being made to reflect a strengthened economic outlook. They now point to at least three rate hikes this year and if only one member switched from three to four, we would be looking for four hikes.
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The central bank boosted its key short-term rate Wednesday by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent and said it will keep shrinking its bond portfolio.
"While there were some aspects of today's announcement that were perhaps more hawkish than some expected, ultimately the currency market appeared to focus on the unchanged projection of a total of three rate hikes for 2018, which perhaps disappointed some who expected policymakers to signal a more aggressive near-term rate path", said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities. The Fed's preferred inflation measure is forecast barely move up to 2.0% in 2019. They now expect the unemployment rate to fall to 3.8 percent this year and 3.6 percent in 2019, a low level by historical standards.
Despite Wednesday's move US interest rates are still far lower than the historic norm of about 5 percent. Powell said the decision to raise the federal funds rate is another step in the process of gradually scaling back monetary policy accommodation, as the economic expansion continues.
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Some analysts also worry about the economic consequences of President Donald Trump's proposed tariffs on imports, which risk triggering a trade war with other nations. The U.S. economy is on track to expand 2.7 percent this year and 2.4 percent in 2019, Fed officials now say, a jump from their previous projection done before the Republican tax cuts were finalized. Yellen gave the Feds a reality-check during her three years as chairman. The central bank upped its long-run estimate to 2.9% from 2.8% and it's likely to raise it even further, reversing a long process during which the Fed lowered its target.
Equity markets were down worldwide, with the 1 percent increase in Japan's Nikkei the only positive among major indexes for the day. But a recent $1.5 trillion tax cut and $300 billion spending bill, along with an improved economic outlook, have more recently changed that calculus. "The prospect of more tariffs is making markets very unsettled and you're going to see choppy trading until we see the effect they are having on earnings", said Jamie Cox, a managing partner for Harris Financial Group.
But U.S. wage growth has remained sluggish and household budgets are tight.
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