The U.S. Federal Reserve raised interest rates on Wednesday and signaled a faster pace of increases in 2017 as central bankers adapted to the incoming Trump administration's promises of tax cuts, spending and deregulation.
The Federal Reserve on Wednesday moved forward with an expected interest rate hike and took a slightly more hawkish stance by saying it expects more tightening in 2017 than it did three months ago. The Fed’s so-called “dot plot” showed the central bank has now penciled in three rate hikes in 2017 instead of the two moves seen in September.
The projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3.0 percent. That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.
Citing the steady growth of the American economy, the Federal Reserve said Wednesday that it would increase its benchmark interest rate for just the second time since the 2008 financial crisis.
The widely expected decision moves the Fed’s benchmark rate to a range between 0.5 percent and 0.75 percent, still a very low level by historical standards.
In announcing the decision, which followed a two-day meeting of the Fed’s policy-making committee, the central bank gave little indication that the election of Donald J. Trump has altered its economic outlook. The Fed said it still expected a slow economic expansion, and it still expected to continue a slow march toward higher rates. Fed officials said they expected to raise rates three times in 2017.
“My colleagues and I are recognizing the considerable progress the economy has made,” Janet L. Yellen, the Fed chairwoman, said at a news conference after the announcement. “We expect the economy will continue to perform well.”
The decision was taken by a unanimous vote of the 10 members of the Federal Open Market Committee, the first time in recent months the Fed has acted by consensus. The Fed is holding rates at low levels to support economic growth by encouraging borrowing and risk-taking. The committee’s statement said it judged that the economy still needed help.
The Fed’s economic outlook was essentially unchanged from the last round of forecasts in September. Fed officials continued to predict the economy would expand at an annual rate of about 2 percent for the next few years. They expect little further decline in the unemployment rate, which stood at 4.6 percent in November. Inflation, meanwhile, is expected to reach 2 percent — the pace the Fed regards as healthy — and then stay there.
Fed officials predicted they would raise the Fed’s benchmark rate a little more quickly in the coming years, reaching 2.1 percent by the end of 2018. In September they had predicted that it would reach 1.9 percent by the end of 2018. The new projections, however, still reflected a significantly slower pace of increase than Fed officials predicted last December, when they expected the benchmark rate to reach 3.3 percent by the end of 2018.
The central bank continued to describe that pace as "gradual," keeping policy still slightly loose and supporting some further improvement in the job market. It sees unemployment falling to 4.5 percent next year and remaining at that level, which is considered to be close to full employment. The economy is projected to grow 2.1 percent in 2017, up from a previous forecast of 2.0 percent.
The dollar index, which tracks the greenback against a basket of currencies, was at its highest since January 2003, tracking 102.42 in early Asian trade.
The spike in the dollar weighed on the yen, which traded at 117.69 against the greenback as of 8:20 am HK/SIN, while the Australian dollar slipped to $0.7391.
U.S. retail sales barely rose in November and industrial production recorded its biggest drop in eight months, suggesting some loss of momentum in economic growth in the fourth quarter.
Retail sales edged up 0.1 percent last month as households cut back on motor vehicle purchases after rising 0.6 percent in October, the Commerce Department said. Sales were up 3.8 percent from a year ago. Excluding automobiles, gasoline, building materials and food services, retail sales also nudged up 0.1 percent last month after gaining 0.6 percent in October.
Oil prices fell nearly 4 percent on Wednesday on renewed concerns about an oil glut sparked by rising U.S. crude inventories in storage and OPEC saying output cuts must be implemented to avoid the prospect of a growing surplus.
Prices extended losses after the Federal Reserve delivered an anticipated U.S. interest rate hike. The rate hike boosted the dollar, making greenback-traded fuel imports more expensive for countries using other currencies at home.
International Brent crude futures were down $1.68, or 3 percent, at $54.04 per barrel at 2:41 p.m. ET (1928 GMT). U.S. West Texas Intermediate (WTI) crude oil futures settled down $1.94, or 3.7 percent, to $51.04 a barrel.
Inventories at the Cushing, Oklahoma, delivery hub rose once again, the sixth build in seven weeks, data from the Energy Information Administration showed on Wednesday.
The Organization of the Petroleum Exporting Countries on Wednesday signaled a growing oil supply surplus next year unless members implement their deal to curb output from record levels and outside producers also deliver on cutback pledges made last weekend.
Reference: Market Watch, Reuters, CNBC, New York Times
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