United States stocks end lower on trade tensions, Fed rate hike

Ann Santiago
June 15, 2018

Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the usa jobs market as "strong" and said economic activity had been rising at "a solid rate".

The US Federal Reserve raised the benchmark lending rate on Wednesday (13 June) which brings the the federal funds rate to a range of 1.75 to 2 per cent.

Markets had priced in a rate hike as a near certainty ahead of the meeting, with all eyes on the economic projections of the Fed's economists and prospects for more increases in the second half of the year.

At a news conference, Powell sought to portray the Fed's actions as evidence mainly that the economy is doing well and not that the central bank is eager to accelerate its rate increases. While awaiting for Fed Chair to deliver his prepared remarks and to field questions from the financial press a report that the Trump administration is finalizing a list of Chinese goods to be subject to additional tariffs hit the USA dollar like a ton of bricks.

The Federal Reserve on Wednesday announced that it raised its benchmark interest rate, as had been widely expected.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual rate increases likely warranted as the economy enters a 10th straight year of growth. And if the Fed were to increase rates excessively without having a proper measure of the slack in the labor market, the result would be a curtailment of aggregate demand, pushing the economy into recession. The Fed expects unemployment to fall to 3.6% this year, and, said Powell, "Most people who want to find jobs are finding them".

Most simply, the fed funds rate determines the interest rate at which banks borrow short-term money. If the Fed does implement the tightening process as expected, that would put the the key interest rate at between 3% and 3.25% by the end of 2019. After keeping interest rates low for years to boost growth, the central bank is now moving rates back to what economists say is a neutral position-one that neither boosts growth nor depresses it. The USD gained as soon as the projections and the rate announcement were public, but there was a sudden retraction when the news of the Trump administration moving forward with tariffs on Chinese goods that could come as early as Friday.

Boeing and Caterpillar, two blue-chip companies with significant operations in China, both lost around two per cent.

The US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens. It would allow the Fed to be less choreographed and more flexible in cutting or raising rates as economic conditions warrant.

In a technical move, the central bank also made a decision to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.

But wages are rising along with stronger economic growth.

But it's widely expected that - if not at this meeting, then next month - the European Central Bank will set out a timetable for when it ends its quantitative easing program, which may be as early as the end of this year.

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