Home Major Pairs FOMC Raises Rates by 25 Basis Points in March

FOMC Raises Rates by 25 Basis Points in March

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Written By: Richard Koch – Forex Focus

Jerome Powell’s debut as Fed Chairman begins with a rate hike.

On March 21, the Federal Open Market Committee (FOMC) of the US Federal Reserve Board under its new chairman, Jerome Powell, raised benchmark interest rates, or the target for the federal funds rate, by 25 basis points to 1.5-1.75 percent, effectively bringing the federal funds rate to a little above 1.6 percent. The rate hike, in line with market expectations, was unanimous, with all eight members of the board voting in favour, bringing the key interest rate in the United States to its highest level since the 2008 financial crisis.

A former investment banker, Jerome Powell took over the reins from his predecessor, Janet Yellen, on February 5 of this year to be appointed as the 16th chairman of the Federal Reserve Board of Governors. Prior to being a member of the Federal Reserve Board from 2012, Powell served as Under Secretary of the Treasury for Domestic Finance under President George H. W. Bush in 1992.

Economic activity in the US has been rising at a moderate pace in spite of a strong labour market and record unemployment rate. But recent data has indicated a moderation in household spending and fixed-income investment by businesses since fourth quarter 2017. The Fed also changed the language of its statement, acknowledging the slowdown after it indicated “solid” growth following the January meeting. In addition, consumer inflation is above the central bank’s projected target of 2 percent, while core inflation is hovering around the bank’s 2-percent target.

In his first press conference following the FOMC meeting, the Fed chairman said that gradual adjustments in interest rates will lead to further job creation and a strong labour market with moderate expansion in economic activity. The central bank is also of the view that near-term risks to inflation are well-balanced, and inflation on a 12-month basis is expected to rise in the coming months and stabilise close to 2 percent. The statement also read that the timing and size of interest-rate increases in the future will be taken based on incoming data on the economic conditions in the labour market, inflation pressures and expectations, and international developments.

Highlights of the recent economic data from the US 

The revised annual figures for fourth-quarter gross domestic product (GDP) in the US came in at 2.5 percent, slightly below the initially reported numbers of 2.6 percent, on the back of a fall in inventories. The numbers were sharply below the 3.2-percent pace set in the third quarter of 2017, with expectations of a further decline in the first-quarter 2018 numbers.

The unemployment rate in the country was unchanged at 17-year lows in February of this year. Although analysts expected unemployment to slip to 4 percent, the number of unemployed personnel increased by 22,000 to 6.71 million in February, leading to the figures remaining unaffected for the fifth month in a row.

Personal consumption expenditure (PCE) inflation, meanwhile, rose to 2.2 percent in February, higher than the 2.1 percent reported in January, although the monthly figures slipped to 0.2 from 0.5 percent. The annual core inflation rate, however, remained flat at 1.8 percent, unchanged for the third month in a row.

Fed projections 

The Federal Reserve revised its median GDP estimates for 2018 from 2.5 percent in December of last year to 2.7 percent in March, and for 2019 from 2.1 to 2.4 percent. The board, however, left their 2020 and longer-term projections unchanged at 2 and 1.8 percent respectively. The Fed also lowered its estimates for the unemployment rate this year to 3.8 percent from the previously announced 3.9 percent, while for 2019 the unemployment rate in the country is expected to fall to 3.6 percent from 3.9 percent.

The central bank stuck to its December guidance for the PCE, a measure to track the prices of goods and services purchased by consumers in the economy. The PCE is expected to rise to 1.9 percent in 2018 followed by 2.0 percent the next year, while in 2020 the bank projects consumer inflation to rise to 2.1 percent from the earlier projections of 2.0 percent. Core PCE inflation is, however, expected to rise faster with the Fed projecting a 2.1-percent increase in the core inflation numbers in 2019 and 2020 correspondingly. 

Following the March FOMC meeting, the Federal Reserve released its dot-plot forecast of the expected rate increases for the next three years. Of the 15 officials forecasting interest-rate hikes, seven expect interest rates to rise three to four times this year, while the remaining eight are looking for interest rates to rise by a maximum of two times. Officials also expect interest rates to tread higher with at least two increases in 2019 and 2020 correspondingly, bringing the federal funds rate to 3.375 percent effectively, higher than the 3-percent equilibrium rate, as indicated by the dots.

Reaction of major FX pairs to the FOMC decision

The greenback reversed most of its previous day’s gains versus the majors after the Fed announced its interest-rate decision. Versus the euro, the dollar gave back all of its previous session’s gains to settle close to the day’s highs of 1.2336 on Wednesday, March 21, slipping around 0.8 percent for the day. Against the pound sterling, the US currency dropped more than one percent to end the session at 1.4139. The pair extended its gains, breaking key near-term resistances at 1.4200, before pulling back later on Thursday.

The greenback also remained weak against its Japanese counterpart, with the USDJPY pair settling at 106.04 on Wednesday, before sliding further on Thursday to settle at its lowest level since November 11, 2016. The biggest decline was, however, seen against the Canadian dollar, with the pair settling at 1.2901 on Wednesday, a drop of close to 1.5 percent for the session. The greenback, which had been in a bull run against the loonie since the middle of last year, touched nine-month highs of 1.3124 earlier in March.

The next FOMC meeting is scheduled for May 1-2 followed by another one for June 12-13.

 

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