Despite the tirade by US President Donald Trump, the Federal Reserve hiked interest rates by a quarter- point yesterday, taking the target range for its benchmark federal funds rate to 2.25-2.5%.
This is the fourth time the Fed has increased rates this year. However, it has reduced its projection for future rate hikes in 2019 to 2 as opposed to 3 earlier. Moreover, the Fed said that it would continue to reduce the size of its balance sheet by US$ 50 billion every year.
The Fed has slightly lowered the growth outlook in the US to 3% in 2018 (decline by 0.1%) and 2.3% in 2019 (down by 0.2%). Headline inflation growth is also expected to be slightly lower at 1.9% for 2018 and 2019 (from 2.1% and 2% earlier). The unemployment rate is expected to fall to 3.5% in 2019 but increase to 3.6% and 3.8% in 2020 and 2021 respectively. Broadly, the Fed expressed confidence that the US economy was doing well and did not need its support by means of lower interest rates or by maintaining a strong balance sheet.
To soothe financial markets, the Fed adopted what some would view as a softer stance, saying that it will “continue to monitor global economic and financial developments and assess their implications for the economic outlook.” Fed Chairman Jerome Powell commented on future direction, “There’s real uncertainty about the pace and the destination of further rate increases, and we’re going to be letting incoming data inform our thinking about the appropriate path.” Trump has strongly criticised the central bank for harming growth prospects with repeated monetary tightening.
However, the Fed announcement led to the expected bloodbath in stock markets, raising fears of capital outflow. Across Asia, sell-offs have been the order of the day including MSCI Asia Pacific Index dropped 1.9% by 2:40 p.m. in Hong Kong; Topix index and Nikkei 225 Stock Average fell by more than 2.5% and benchmark gauges of Hong Kong and Australia lost over 1.3%. S&P 500 Index futures suffered a fall by as much as 1.1%, erasing earlier gains and closing at its lowest level since September 2017. However, experts feel India is in a relatively stronger position with favourable macros like oil prices, recovering rupee and lowering of rate hike expectations by the Fed for next year.
