Markets

NY Federal Reserve president claims Central Bank may rethink monetary policy

NY Federal Reserve president claims Central Bank may rethink monetary policy

The Federal Open Markets Committee (FOMC) of the US Federal Reserve at its meeting on Wednesday made a decision to raise the target range for the federal funds rate to 2.25 per cent to 2.50 per cent, in view of the realised and expected labor market conditions and inflation.

But now, a day after fresh Fed forecasts showed most policymakers see two rate hikes next year and one in 2020, the betting in rate futures markets is that they will need to backtrack.

Here's Republican Andy Barr of Kentucky grilling Powell in February: "Your task is to continue to unwind the Fed's asset purchases, gradually, and predictably return to market-based interest rates, and remove monetary distortions from the economy without producing excessive disruption.”".

"Nothing will deter us from doing what we think is the right thing to do", Powell said.

USA stocks had been up sharply before the Fed's announcement, but the Dow Jones Industrial Average closed down about 352 points. The yield on the 2-year Treasury note fell to 2.62 percent from 2.65 percent. Despite his satisfaction with the balance sheet, he still prefers to use the fed funds rate to control interest rates because anything else would spook the market.

But, it added, there would be fewer rate hikes in 2019, with the USA economy having been growing strongly and the job market improving. The fear is that optimism could translate into more rate hikes in the future. The central bank also emphasized that future rate increases will depend on the strength of the USA economy. The hike marked the fourth of 2018 and the ninth since the Fed's tightening path began in 2015.

United States stocks are off to a bad start.

The silver price dropped and then bounced back after the Fed's Wednesday rate hike, with gold following suit with a 1-percent rise. It's now likelier, as Powell said at his news conference, to suit its rate policy to the latest economic data - to become more flexible or, in Fed parlance, "data-dependent".

At a press conference, Powell told reporters that the Eccles Building is content with its strategy to unwind its $4.5 trillion balance sheet.

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When asked about being challenged by the White House not to increase interest rates, Powell said: "We're going to do our jobs the way we've always done them". No longer will the Fed be able to signal weeks in advance the near-certainty of a shift in rates.

It was just Wednesday that the Federal Reserve chairman played down the role of market turmoil in setting monetary policy.

"What appeared to be even more concerning to equity investors is that Powell is not only ignoring Trump's calls to pause the tightening cycle, but he is also not listening to them".

On Wall Street, The Dow Jones fell 386.68 points, or 1.63 per cent, to 23,288.96, the S&P 500 fell 34.8 points, or 1.37 per cent, to 2511.36 and the Nasdaq Composite shed 161.74 points, or 2.38 per cent, to 6622.18.

The rate hike came a day after Mr Trump urged the Fed not to "make yet another mistake", while on Monday he said it was "incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us. the Fed is even considering yet another rate hike".

For now, most USA economic barometers are still showing strength. The unemployment rate, now at a 49-year low of 3.7 per cent, is expected to fall to 3.5 per cent next year and rise slightly in 2020 and 2021. All of the major indexes have lost 16 to 26 percent from their highs this summer and fall.

Consumer confidence and stocks are both whipped around by views on the economy, and the correlation between the two is notable.

Asian shares slid on Thursday after the U.S. Federal Reserve raised rates, as expected, and kept most of its guidance for additional hikes over the next two years, dashing investor hopes for a more dovish policy outlook.

With Wednesday's hike, the federal funds rate will now sit in a range from 2.25% to 2.5%, bordering the lower end of what Fed officials consider the neutral zone in which rates would neither stimulate nor restrain the economy. "I think the Fed went too far too fast".