Tokyo stocks open flat after US Fed rate hike

Ann Santiago
March 24, 2018

Federal Reserve Chairman Jerome Powell set a record on Wednesday, after the USA central bank delivered a widely-expected interest rate hike, by holding the briefest quarterly news conference since the Fed began giving them in April 2011.

"I think they will end up tightening four times this year, but they don't have to signal that yet", said Jim O'Sullivan, chief US economist at High Frequency Economics.

There's growing concern among economists that the GOP tax cuts and the additional boost in federal government spending could cause the US economy to overheat, requiring the Fed to hike rates even more than three times this year. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.

Foster said: "The message in a nutshell is that data, so far, is still not strong enough to justify a faster hiking cycle this year". Wednesday's action was approved 8-0, with the Fed avoiding any dissents at the first meeting Powell has presided over as chairman since succeeding Janet Yellen last month. The median FOMC estimate in the March forecasts for the unemployment rate show it averaging 3.8 per cent in the final quarter of 2018 and 3.6 per cent in 2019 and 2020 - below the 4.1 per cent rate reported in February.

USA stocks initially rallied on the Fed announcement, which suggested no plans to immediately accelerate the pace of tightening monetary policy. This year's estimated United States economic growth was revised up to 2.7 per cent from an earlier forecast of 2.5 per cent.

"The upward revision to growth forecasts was not a surprise, but given low levels of inflation, the additional hikes forecast for 2019 and beyond was more hawkish than anticipated". In addition, the already historically low unemployment rate is seen falling even further, ending next year at a stunning 3.6 percent, according to the quarterly Summary of Economic Projections.

A bigger risk for now is the looming trade war following the US' decision to hike import tariffs on steel and aluminum. "It could change up".


A higher federal funds rate is likely to make it more expensive for consumers to borrow money for mortgages, charge on credits cards, and take out automobile or student loans, among other things. The Fed has long asserted that it is just as dissatisfied when inflation comes in below the number as above it.

However, this time, the tone of the commentary by the US Fed Chairman remained less hawkish and hence we do not see much volatility in the exchange rate of INR against Dollars.

"In the earlier period, strong head winds sapped the momentum of the recovery and weighed down the path of policy", she added.

If the Fed raises rates too slowly, the economy could overheat.

"The cumulative effect (of rate hikes) can be quite significant", said Greg McBride, chief financial analyst for Bankrate.com.

First, and foremost, the Committee inserted into the statement the sentence, "The economic outlook has strengthened in recent months". The Trump administration was expected to impose trade sanctions on China, perhaps including restrictions on Chinese investment and tariffs on as much as $60 billion worth of Chinese products.

Information for this article was contributed by The Washington Post.

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