Wednesday 26 September 2018

Fed hikes key rate for third time this year



America’s central bank has hiked its key interest rate for the third time this year – brushing aside Donald Trump’s criticism of its policy.

Jerome Powell, chair of the US Federal Reserve, batted off questions about criticism by Mr Trump that rate increases undermined the economy’s expansion – saying the Fed did not take into consideration “political factors”.

But there was a note of caution as Mr Powell acknowledged the impact of the burgeoning trade war with China, saying there was a “rising chorus” of concerns from businesses around the country.

The Fed’s latest announcement on Wednesday saw its short-term rate increase by a quarter of a percentage point to a range of 2%-2.25%, the eighth rise since late 2015.

Its decision was widely expected and sees the Fed continue its path of gradually lifting borrowing costs to more normal levels after they were slashed close to zero during the financial crisis.

A statement announcing the increase was seen as marking the end of the era of low rates – dropping a reference to “accommodative” from its description of monetary policy.

The increases come in response to a strengthening US economy and despite Donald Trump’s recent complaint that he was “not thrilled” with the Fed’s hikes under Mr Powell – the president’s own pick to lead the body.

The Fed’s rate-setting committee said that latest indicators showed “that the labour market has continued to strengthen and that economic activity has been rising at a strong rate”.

At the same time as the US has seen rates rise, in the UK and the eurozone they have remained around the ultra-low levels to which they were slashed during the crisis.

In America, the Fed is now forecasting a further rate hike before the year’s end and three more in 2019, plus another in 2020.

The path of interest rates in the world’s largest economy is being closely watched in emerging markets, many of which have big dollar-denominated debts and have also seen foreign investment boosted by the low level of returns available in the US.

Experts are divided on the prospects for the US outlook, with some seeing low unemployment and improving GDP growth – resulting in continued Fed hikes to keep a rein on credit and ensure that the economy does not overheat.

Others worry that the escalating trade war with China will drag on America’s expansion.

Mr Powell said US companies were worried about “disruption of supply chains, materials, cost increases, and loss of markets and things like that”.

Kathleen Brooks, research director at Capital Index, said: “One thing is for sure, Fed chair Powell is not going to be pressured into cutting rates on the back of President Trump’s preference.

“In fact, today’s meeting is a clear signal that rates are moving higher in the coming months, including in December.”



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