Federal Reserve Moves Closer to "Neutral" Interest Rates

Fed makes third interest rate hike this year but Morningstar analysts detected a change in tone in the central bank's statement

Alliance News 27 September, 2018 | 8:08AM Eric Compton
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Federal Reserve raises interest rates

The US Federal Reserve raised its benchmark interest rate band by 25 basis points, in line with market expectations, as the central bank continued its tightening cycle.

"In view of realized and expected labour market conditions and inflation, the committee decided to raise the target range for the federal funds rate to 2.00% to 2.25%," the Federal Open Market Committee said in a statement on Wednesday.

The Fed noted that inflation remains around the target of 2% and future hikes - which are expected this year and next - would take into account the labour market and prices.

US President Donald Trump told reporters at a press conference in New York that he was "not happy" with the increased rate, but said the central bank was reacting to the positive numbers from the economy, for which he took credit.

Unemployment is low and economic expansion passed 4% last quarter.

"They are raising them because we are doing so well. We are doing much better than I projected when I was campaigning," Trump said.

Morningstar Analyst's View - Eric Compton

"Economic data remains positive for the US, with unemployment remaining quite low, household spending and business investment remaining constructive, and real GDP growth expected to be above 3% for 2018. The FOMC’s statement maintained essentially all its language, upholding that further hikes would be gradual and that the risk outlook remains roughly balanced. However, we did notice that the committee removed language that had previously stated that the stance of monetary policy remains accommodative.

"This suggests to us that the FOMC is getting closer to what it views as a neutral rate in the current environment, and may not be certain they are still being accommodative even as the market still expects many more rate hikes.

"Overall, even as our medium-term rate forecasts may change, our long-term rate projection remains intact, and we would expect overall net interest margins to increase at a reduced pace regardless, as competition picks up among banks. Therefore, we are leaving current fair value estimates in place for all of our banks."


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