Powell's Fed debut shows a shift away from theory

07 April, 2018, 00:43 | Author: Salvatore Jensen

Fed officials also raised their forecast for 2018 U.S GDP annual growth to 2.7% this year, up from the December forecast of 2.5%.

The US Federal Reserve did what was widely expected of it - it raised the fed funds rate target by 25 basis points to 1.5%-1.75% following its 20-21 March FOMC meeting.

According to a Federal Reserve news release, information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate.

"A number of participants of the FOMC [the Fed board] did bring up the issue of tariffs", Powell said, adding that the Fed is hearing from many business leaders that "trade policy has become a concern going forward".

It's been two years since the Fed started to tighten its monetary policy, having held rates at close to zero for seven years while it helped to shepherd the nation out of a recession. Powell, a former Fed governor, succeeded Janet Yellen last month.

The US central bank projected late a year ago that it would lift rates three times in 2018, but some investors believe the fiscal stimulus and inflation pressures will push policymakers to add an additional increase to the mix. Powell was among the governors who voted for that approach, and the announcement Wednesday signaled that he will maintain it, particularly if economic growth continues to accelerate and unemployment remains at or below the 4.1 percent level it reached in February.




The median expectation for the federal funds rate remained the same in at 2.1 percent for 2018 but rose for 2019 and 2020 to 2.9 percent and to 3.4 percent, respectively. Fed officials also increased their expectations for GDP growth in 2019 to 2.4% from 2.1% in December previous year. The Fed asserted that part of the deviation from 2 percent reflects unusual price declines that occurred almost a year ago. Virtually every USA recession is preceded by a runup in interest rates.

"Chairman Powell's reiterating of the Fed's accelerating pace of this unwind is a reminder that real yields are likely to normalize, and yields of 4% or higher on the USA ten year treasury might not be so far away", Hyman said.

Similarly, the Fed forecast the jobless rate to fall to as low as 3.6% in 2019 from the current rate of 4%.

If the Fed raises rates too slowly, the economy could overheat.

It cited a stronger outlook for economic growth and did not give reasons for the higher projection - saying that it was based on the median expectations of the committee. It was the sixth quarter point move since December 2015.

The latest Fed projections show the core inflation rate unchanged at 1.9% this year but would nudge up slightly to 2.1% in 2019 and 2020 (both revised higher from December's forecast of 2.0% for both years).

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