UAE raises benchmark rate by 25 basis points following Fed increase

30 September, 2018, 05:16 | Author: Salvatore Jensen
  • Fed announces interest rate decision

The Federal Reserve on Wednesday raised rates for the third time this year, reflecting a strong economy with low unemployment.

Asked about the pressure from Trump to keep rates low, Powell said the Fed is focused on its mission to keep the economy healthy and doesn't consider politics in the process.

While a clear tailwind for the U.S. dollar, Westpac Bank says there's a risk the greenback may weaken ahead of the United States midterm elections. "Layer on top of that rising interest rates and the rising headwind that that presents toward consumers that are trying to get their debt paid off, and it's just going to further strain families that already have tight household budgets". "I can not see reasons to slow down raising rates as long as the jobless rate keeps falling", said Tomoaki Shishido, fixed income strategist at Nomura Securities.

While calling the economy strong and financial vulnerabilities moderate, he also said the central bank is hearing a "rising chorus" of concern about tariffs and the U.S.'s turn toward protectionist trade policies. It also dropped the word "accommodative" to describe its monetary policy stance, though Fed Chairman Jerome Powell sought to downplay that move.

YIELDS: Treasury yields have been climbing steadily this year as the strengthening economy bolstered expectations for rate increases by the Fed. Federal Reserve policymakers expect to hike rates one more time this year, three times next year, and only once in 2020, the same as they forecast in June.

The yield on the 10-year Treasury, which is used to set rates on mortgages, stood at 3.08 percent, down from 3.10 percent a day earlier.

In my opinion, removing "accommodation" means there is no preset path of rate hikes and every Fed meeting moving forward becomes a toss-up.

But analysts worry that raising rates too quickly could tip the economy into recession. If any more board members indicate they think a December rate hike is merited now, it will be seen as almost a done deal.

The Fed still foresees another rate hike in December, three more next year, and one increase in 2020. Inasmuch as the market has factored in the nearly certainty that the Federal Reserve will announce an interest rate hike of 25 basis points tomorrow (1/4%), it is the pace of rate hikes in the future that will garner the most significant attention.

Yet Some investors see limited need for the Fed to keep raising rates as inflation shows no signs of picking up, despite continued economic growth and the jobless rate near a two-decade low. That would put the benchmark overnight lending rate at 3.4 percent, roughly half a percentage point above the Fed's estimated "neutral" rate of interest, at which rates neither stimulate nor restrict the economy. Stocks usually do well when the Fed starts to raise interest rates because the higher rates reflect solid economic growth, which is associated with strong company profits.

U.S. tariffs and retaliatory levies by others could slow the global economic growth, but broad-based tariffs could also stoke inflation by raising the prices of imported goods. It's possible the Fed could eliminate that part of the statement today, another signal the central bank plans to stay the course on raising rates.

Indeed, the Fed's regional banks have reported that some businesses are delaying investments until they see some resolution to the trade hostilities. It also raised its projection for growth in 2019 to 2.5 percent from 2.4 percent.



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