US Fed raises interest rates, signals more hikes ahead

US Fed raises interest rates, signals more hikes ahead

In line with weakness in global markets, India's BSE Sensex and Nifty50 ended lower yesterday after the US Federal Reserve raised its short-term interest rate.

Investors' confidence that the global economy is headed for a significant slowdown was further weakened when China's central bank introduced a new lending facility for small private businesses, which was seen as a targeted rate cut created to kickstart the spluttering economy.

The S&P 500 index skidded 39.54 points, or 1.6 per cent, to 2,467.42.

After steady gains through the spring and summer, stocks have fallen sharply in the fall as investors worry that global economic growth is cooling off. But most corporate bonds are fixed-rate, which means they are benchmarked to Treasury yields.

Fed Chairman Jerome Powell said Wednesday that he expects the Fed will hike interest rates twice in 2019, down from the previously forecasted three hikes. Powell told the media on Wednesday that the President's tweets will not have any bearing on the Fed's policies.

The Fed members maintained an optimistic attitude towards the U.S. economy, minimizing the forecasts of the economy and inflation at 2019. For the last three years the Fed has been able to tell investors weeks in advance that it was nearly certain to increase rates.

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The stock market declines in the final weeks of the year have come amid high volatility, a pattern Mnuchin blamed on algorithmic trading and the Volcker Rule.

Wren said investors felt Fed Chairman Jerome Powell came off as unconcerned about the state of the US economy and fears that the economy could not just slow down, as expected, but go into a recession in 2019 or 2020.

The Fed chief went on to say policy could move to neutral as opposed to being accommodative. Relative to their size, they also tend to carry more debt than larger companies, which could be a problem in a slower economy with higher interest rates.

"We expect additional rate hikes will invert the three-months to 10-year yield curve, which is a reliable signal for a bear market for stocks and a coming recession for both the USA and the rest of the world", said Jeffrey Kleintop, chief investment strategist at Charles Schwab in Boston.

The Federal Open Market Committee raised its main rate by 25-bps to a range of 2.25-2.50%, as was widely expected (72% probability according to Fed funds futures), but made a number of tweaks to its GDP and inflation forecasts, and thus, to its glide path of interest rates (known as the "dot plot") moving forward.

"Chairman Powell was threading the needle today", said Frances Donald, head of macroeconomic strategy at Manulife Asset Management.

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In its official statement, the Fed also said increases to its benchmark rate would help the United States economy sustain its expansion, keeping the unemployment rate low and inflation near 2 per cent.

USA markets are cooling after "years of outperformance" and working off "overvaluation in some areas" such as major tech companies, said Shane Oliver of AMP Capital in a report.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1.1 percent, with Australian shares also declining 1.3 percent to a two-year closing low.

Oil prices continued to retreat.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

The S&P 500 fell 39 points, or 1.6 per cent, to 2,467.

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