US Fed raises key rate to 1.0-1.25%, signals one more hike in 2017

WASHINGTON, United States — The US Federal Reserve raised its benchmark interest rate by a quarter point to 1.0-1.25 percent on Wednesday and signaled another increase remains likely this year, despite the recent spate of weak economic data.

In explaining this second rate hike of 2017 and plans for more increases in the coming months, Federal Reserve Chair Janet Yellen said the move reflected the progress in the world’s largest economy, which continues to add jobs at a solid pace.

“The economy is doing well, is showing resilience,” Yellen said in her quarterly press conference.

“We have a very strong labor market, an unemployment rate that’s declined to levels we have not seen since 2001. And even with some moderation in the pace of job growth, we have a labor market that continues to strengthen.”

And despite recent tepid price pressures, the Fed expects inflation to pick up — eventually, citing “one-off reductions” in certain categories such as cell phone services and prescription drugs as the reason for the recent lower readings.

Those factors mean the Fed’s preferred inflation measure will remain below the two percent target for some time, but will gradually rise to the target level over “the medium term.”

But coming on a day when the consumer price index and retail sales fell, in large part due to falling food and gasoline prices, but with widespread declines in other categories, some economists are saying the Fed is no longer basing its decision on the data, as it has repeatedly said.

“The third rate hike in seven months, coming not long after a relatively poor Q1 GDP print, suggests the Fed has become less data-dependent in its monetary policy decisions,” Fitch Ratings Chief Economist Brian Coulton said.

One FOMC member, Minneapolis Federal Reserve Bank President Neel Kashkari, dissented from the decision, preferring to keep policy on hold for now.
Third hike coming?

Analysts in recent weeks have become increasingly doubtful there would be a third rate increase later this year, as inflation, consumption and other economic data have indicated the weakness seen in the first quarter has continued.

Fed futures markets now put the chances for another rate increase this year to below 50 percent.

Chris Low of FTN Financial said the Fed “compromised” by continuing the rate increases despite falling inflation, but “the market expects the Fed to take a break.”

However, Yellen said business and household confidence remain quite strong, and echoed the statement from the Fed’s policy-setting Federal Open Market Committee, which repeated its confidence that the economy will continue to expand “at a moderate pace” even with further gradual rate increases.

Asked about the criticism, Yellen said, “I don’t think …the Fed’s credibility has been impaired.”

She once again said the path of interest rates “is not a pre-set course,” but the Fed’s quarterly projections show they still anticipate making a third rate increase this year, with the median federal funds rate ending 2017 at 1.4 percent.

That would be followed by three rate increases in 2018 and three more in 2019, with the key rate at 2.9 percent by the end of that period.
Forecasts

In their quarterly projections, Fed officials saw the economy growing slightly faster than previously forecast, with GDP up 2.2 percent this year, a tenth of a percentage point higher than forecast in March.

But the estimate for the central bank’s preferred measure of inflation, the PCE price index, was cut three-tenths to 1.6 percent, while the core PCE, which excludes volatile food and energy prices, was cut two-tenths to 1.7 percent, according to the Summary of Economic Projections.

The Fed now sees the unemployment rate ending the year at 4.3 percent, where it sits currently, rather than the 4.5 percent previously expected.

The central bank also confirmed that it will begin later this year to implement a plan to reduce the size of its investment holdings, which were built up to record levels during the financial crisis to help support the economy, especially once interest rates reached zero.

As long as the economy “evolves broadly as expected,” the plan “would gradually reduce the Federal Reserve’s securities holdings,” the FOMC statement said. CBB

source: business.inquirer.net

Wall Street set to open higher on robust jobs data

U.S. stocks looked set to open higher on Friday after an upbeat monthly jobs report underscored the strength of the U.S. economy and firmed the odds for the first interest rate hike this year.

The Labor Department data showed 235,000 jobs were added in the public and private sectors in February, blowing past economists' average estimate of 190,000 as the construction industry recorded its largest gain in nearly 10 years.

Unemployment rate stood at 4.7 percent, while average earnings edged up 0.2 percent.

"I suspect that there is a positive impact from milder weather in February which may have skewed this number to the high side," said Alan Gayle, director of asset allocation at Ridgeworth Investments in Atlanta, Georgia.

"But the operative message is that the jobs market continues to strengthen, and that is likely to give the FOMC a green light to raise rates when they meet next week."

A slew of recent robust data has encouraged the Federal Reserve to turn more hawkish on interest rates.

The odds of a rate hike during the Fed's meeting next week edged up to 89.7 percent after the report, according to Reuters data.

Fed Chair Janet Yellen's conference after the two-day meeting next week will be closely watched for clues on the pace of future rate hikes.

Dow e-minis were up 88 points, or 0.42 percent, at 8:32 a.m. ET (1332 GMT), with 18,690 contracts changing hands.

S&P 500 e-minis were up 10.5 points, or 0.44 percent, with 191,460 contracts traded.

Nasdaq 100 e-minis were up 21 points, or 0.39 percent, on volume of 15,479 contracts.

In the 49 days of Donald Trump's presidency, the Dow Jones Industrial Average broke above 20,000 points and the S&P 500 crossed $20 trillion in market value on bets that he would usher in an era of tax cuts, simpler regulations and higher infrastructure spending.

However, the lack of detail on Trump's plans has raised questions about valuations and taken the heat off the post-election rally.

Wall Street closed little changed on Thursday as a late rebound in oil prices cut losses in the energy sector. Oil was up 0.7 percent on Friday.

Shares of big U.S. banks, including Goldman Sachs, Bank of America and Morgan Stanley, were up more than 1 percent in premarket trading.

Alexandria Real Estate Equities was off 5 percent at $108.04 after the REIT priced an offering of 6.1 million shares at $108.55 per share - a 4.5 percent discount to its Thursday close.

Finisar Corp dropped 17 percent to $29.11 after the network equipment maker issued disappointing revenue and profit forecasts for the current quarter. — Reuters

source: gmanetwork.com

Fed to raise rates as Trump economy looms

WASHINGTON, United States — There is little room for doubt that the US Federal Reserve will raise the benchmark interest rate in the coming week for only the second time in a decade.

With unemployment at a nine-year low, jobs being created at an average of 180,000 per month, the economy growing at better than three percent in the most recent quarter and some signs of a pickup in inflation, the writing is on the wall.

Some members of the Federal Open Market Committee, which sets the key federal funds rate, the basis for mortgage and lending rates, have even cautioned that failing to raise rates in December could harm the central bank’s credibility, given expectations set by policymakers in recent months.

“All the necessary and sufficient conditions are there,” Mark Zandi, chief economist at Moody’s Analytics, told AFP.

With a rate hike assumed, the question remains whether Wednesday’s move will be the first in a series.

That was what central bankers thought was going to happen a year ago, when they announced the start of the “normalization” of interest rates after keeping them at zero in the wake of the 2008 financial crisis.

‘Normalization’ under Trump?

But the Fed’s efforts to turn the page on monetary stimulus with gradual tightening quickly went off track, despite forecasts for up to four rate hikes in 2016.

Seven times this year, the FOMC declined to raise rates, impeded by poor US economic data, Britain’s shock June vote to exit the European Union, and above all by fears of interrupting a fragile recovery.

And analysts said there were no guarantees 2017 would see the beginning of a tightening cycle either, given uncertainties in geopolitics and the yet-to-be-determined policies of President-elect Donald Trump, who shocked the world last month by winning the US election while offering proposals scant on specifics.

A Wall Street Journal poll of economists this week put the Federal funds rate at an average of 1.26 percent by December 2017, implying four rate increases. A Reuters poll projects three rate increases.

Stocks have rallied since Trump’s win, with major indices repeatedly setting records on investor expectations that Trump will cut taxes and offer fiscal stimulus, including infrastructure spending — programs the would fuel growth and inflation, and make rate hikes more likely.

The ratings agency Fitch also said it expected US debts and deficits to rise under a likely Trump stimulus plan.

But William Dudley, the influential FOMC vice chair and president of the New York Federal Reserve Bank, said in a speech Monday that Trump’s victory created “considerable” uncertainty and it was too early to say whether the Fed’s plan for gradual tightening would have to be adjusted.

Shifting dynamics in Washington

Fed futures do not expect a sudden rush of higher rates: the CME FedWatch tool does not forsee a 2017 rate hike before June.

Zandi of Moody’s Analytics said he was looking for three rate increases next year, with policymakers waiting at least until spring to see what the Trump administration would do.

But the upset Trump victory changed things, he said.

“With the election, I think the political dynamics have shifted,” said Zandi, who in June produced a report critical of Trump policy proposals. “I think there’s a good chance that we get some form of fiscal stimulus next year that’s deficit financed.”

“That argues for a more rapid normalization of interest rates,” he said. “I’m sure we’ll have reticent Republicans who don’t want to deficit spend. I think they’ll be more willing to buy into the argument that the stimulus that Trump proposes will lead to supply-side benefits, to a bigger economy.”

But Zandi said uncertain geopolitical developments on the horizon — far right victories in European elections and threats to European integration for example — could throw the Fed off track again.

Jim Glassman, managing director and chief economist for commercial banking at JP Morgan Chase, said he believed the Fed missed an opportunity by putting off rate hikes in 2016 as its worst fears failed to materialize.

“I think the economy’s doing fine,” he told AFP. “The Fed taking its foot off the gas is not going to derail the US economy.” CBB

source: business.inquirer.net