The U.S. Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.
Policymakers predicted rates would rise three times next year and two times in 2020, a further indication of confidence in the economy.
In its first policy meeting under new Fed chief Jerome Powell, the U.S. central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.
The Fed also raised the estimated longer-term “neutral” rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought.
“The economic outlook has strengthened in recent months,” the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent.
According to the summary of economic projections that the FOMC releases each quarter, three rate hikes is still the baseline. However, had one more member indicated a higher funds rate, the forecast likely would have gone to four.
Fed officials raised their forecast for 2018 GDP growth from 2.5 percent in December to 2.7 percent, and increased the 2019 expectation from 2.1 percent to 2.4 percent.
However, growth is likely to cool after, with the 2020 forecast holding at 2 percent and the longer-run measure still at 1.8 percent.
The committee noted that household spending and business fixed investment both "have moderated from their strong fourth-quarter readings."
Inflation expectations, on which the market has been laser-focused lately, changed little. The 2018 forecast remains just 1.9 percent for both core and headline inflation — core excludes food and energy prices. For 2019, the forecast for core personal consumption expenditures edged higher to 2.1 percent from 2 percent, while headline remained at 2 percent. The committee nudged the 2020 level up from 2 percent to 2.1 percent for both core and headline.
The benign inflation expectations are particularly remarkable considering that Fed officials now see unemployment running even lower than before. Currently at 4.1 percent, officials now see the rate for 2018 at 3.8 percent, down from the 3.9 percent December forecast, and 2019 falling all the way to 3.6 percent from the original 3.9 percent outlook. The 2020 forecast also fell, from 4 percent to 3.6 percent.
The Trump administration’s punchbowl of tax cuts and government spending may leave the U.S. economy with a stinging hangover in two years, according to fresh Federal Reserve forecasts that show monetary policy moving into “restrictive” territory for the first time in more than a decade.
The new round of projections by policymakers, issued on Wednesday, was the clearest indication yet that higher short-term growth coming from massive fiscal stimulus may pose a cost down the road in the form of interest rates high enough to actually put the brakes on the economy.
· Interest rates futures implied traders priced in the next rate hike at the Fed’s June 12-13 policy meeting, followed by another rate increase in December, CME Group’s FedWatch program showed.
· The dollar recorded its largest one-day loss in two months against a basket of currencies on Wednesday as Federal Reserve officials stuck to their view of three rate increases for 2018 as they want to see a further pickup in inflation.
The dollar index, which tracks the greenback versus a basket of six currencies, fell 0.693 points or 0.77 percent, to 89.678. It booked its steepest one-day drop since Jan. 24 when it fell 1 percent.
The greenback ended down 0.54 percent at 105.95 yen.
The euro rose 0.82 percent for its biggest one-day gain in nearly two months at $1.2340.
· The U.S. dollar slid against major currencies, bond yields slipped, and stocks were mostly steady on Wednesday after the Federal Reserve raised its policy interest rate, and noted economic growth was strengthening, but left markets expecting only three rate rises this year.
Two-year note yields US2YT=RR, which are highly sensitive to interest rate policy, jumped as high as 2.366 percent, the highest since September 2008, before falling back to 2.308 percent.
Benchmark 10-year note yields US10YT=RR increased to 2.936 percent, the highest since March 12, before retracing to 2.894 percent.
· President Donald Trump, in talks with congressional leaders on Wednesday, backed a $1.3 trillion spending bill meant to avert a U.S. government shutdown, even though it is expected to exclude some of his specific immigration-related funding requests.
· The bill has not been formally unveiled, but aides said it will be released soon, with lawmakers hurrying to approve it and send it to Trump for enactment before a midnight Friday shutdown deadline, the latest in a series of such scrambles in 2017-2018.
· President Donald Trump will announce tariffs on Chinese imports on Thursday, a White House official said, in a move aimed at curbing theft of U.S. technology that is likely to trigger retaliation from Beijing and stoke fears of a global trade war.
President Donald Trump is scheduled to sign a memo at 12:30 p.m. EDT (1630 GMT) on Thursday imposing tariffs on Chinese imports in a move aimed at curbing theft of U.S. technology, the White House said on Wednesday.
· China said that a ruling by the World Trade Organization (WTO) on Obama-era U.S. tariffs showed that the United States was a “repeat abuser” of trade remedy measures, and urged it to take immediate action to correct faulty practices.
U.S. President Donald Trump’s decision to impose tariffs on steel and aluminum imports heighten the risk of protectionist trade policies by other countries, which could harm German exports, the economy ministry said in its monthly report.
· Three-quarters of Japanese companies say the Bank of Japan needs to exit from its super-easy monetary policy but most do not see that happening until next year or beyond, a Reuters poll found.
Of some 240 companies that responded to the survey, 74 percent agreed on the need for the BOJ to pull back from its easy monetary policy and two-thirds expected the BOJ’s next move to be a tightening of policy.
· Facebook Inc (FB.O) Chief Executive Mark Zuckerberg said on Wednesday that his company made mistakes in how it handled data belonging to 50 million of its users and promised tougher steps to restrict developers’ access to such information.
· Oil hit a six-week high on Wednesday, closing in on a 3-year peak set in late January, on a surprise decline in U.S. inventories, strong compliance on OPEC production cuts, and persistent concern related to the Iran nuclear deal.
Brent crude futures LCOc1 rose $2.05, or 3 percent, to settle at $69.47, nearly a 7-week high.
U.S. West Texas Intermediate (WTI) crude futures CLc1 gained $1.63, or 2.6 percent, to settle at $65.17, their highest since Feb. 2.
Reference: Reuters, CNBC
Thai
Eng