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Fed hikes interest rate again with three more planned in 2018

Fed hikes interest rate again with three more planned in 2018

The Federal Reserve announced its widely anticipated third interest rate rise of the year and signaled it is on track to hike rates another three times in 2018.

Fed officials said they would raise their federal funds target rate by a quarter percentage point to a range between 1.25% to 1.5% on Wednesday.

The central bank also said it would start to increase monthly balance sheet reductions in January, with a monthly unloading target of $12 billion in treasuries and $8 billion in mortgage-backed securities.

The Federal Open Market Committee voted for the rate hike in a 7-2 vote while reiterating its confidence in a strengthening labor market, solid job gains and and overall expanding US economy.  

The Fed said it would gradually raise rates over the coming year if the economy performs in line with their projections.

‘Our decision reflects our assessment that a gradual removal of monetary policy accommodation will sustain a strong labor market while fostering a return of inflation to 2%, consistent with the maximum employment and price stability objectives assigned to us by law,’ said Fed chairwoman Janet Yellen in her final scheduled press conference.

In November, president Donald Trump nominated Jerome Powell to be the next chair of the Federal Reserve, replacing Yellen when her term comes to an end in February 2018.

Despite increased growth, concerns about below target inflation and stagnant wage growth have led the Fed to alter its outlook for the labor market.

Incoming wage data suggests only a modest rise while inflation has remained persistently low, even with a 4.1% unemployment rate.

'We anticipate some further strengthening in labor market conditions in the months ahead; however, we expect the pace of job gains to moderate over time as we gradually reduce the degree of monetary policy accommodation,’ said Yellen.

‘Allowing the labor market to overheat would raise the risk that monetary policy would need to tighten abruptly at a later stage, jeopardizing the economic expansion.’

Yellen also touched on the digital currency bitcoin, which has surged more than 1,500% in value since the start of this year. She said that the cryptocurrency is a ‘highly speculative asset’ that ‘doesn’t constitute legal tender.’

While the Fed's decision was widely expected to have a mild impact on the market, some investors have reacted with concerns. 

'From a yield curve perspective, we continue to experience a flattening of the yield curve,' said Peng Zhou, senior managing director of derivatives and quantitative strategy at Sun Life Investment Management. 

'This has been brought on by an active Fed pressuring short term rates higher, while long term rates are driven by low inflation expectations and significant domestic and foreign demand.'

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