Fed Raise Rate as US Economy Strengthens

The Fed Reserve implemented the interest rate hike yesterday (March 21) and expected to have two more raise this year. It underlines the increasing confidence that government expenditure and tax reductions will expand the inflation and economy and stimulate further tightening.

During the first policy meeting of the US central bank under the new Fed Chair, Jerome Powell, the Fed showed that inflation would boost after several years below its 2 percent target, as the economy would finally gain momentum. Aside from it, the Fed also lift the forecast for the neutral rate in the longer-term which serves as the indication whether the monetary policy will strengthen or weaken the economy, hence, the current gradual rate hike cycle could possibly drive higher than the previous estimate. According to the statement of the Fed during the last day of its policy meeting, the benchmark rose overnight and contributed a quarter of a percentage point of  1.50 to 1.75 percent. Powell inherited J.Yellen’s position in February and he said that the central bank remained on its slow-moving course of rate hike due to necessary protection against inflation.

Based on the Reuters poll on March 5-13, the rate increase was highly anticipated as 104 economists stated that the Fed will boost borrowing costs for the current week. Also, American stocks move higher on the back of the policy statement prior the decline of gains to close lower. While US Treasury yields had fallen but were able to recovery afterward. The US currency recorded its sharpest decline within a single day in almost two months versus a basket of currencies.

The price hike was regarded to be the latest achievement after years of recovering the world’s biggest economy due to financial crisis and recession in 2007-2009. The Fed decided to tighten its policy three times in 2017. The US$1.8 trillion estimate from the fiscal stimulus of Trump administration combined with signals of wage and price pressures caused Fed officials to assumed that a lot of Americans will get attracted to the tight labor market. Few of them feared that inflation could exceed the Fed’s target in case of an overheated economy.

Policymakers had different votes yesterday, whether the total rate hikes for this year will be three or four. Hence, their predictions indicate that there would be three hikes for 2019 and two times in 2020 which further implies a strong position for the United States. Moreover, the projections of policymakers state that the US economic growth will reach 2.7 percent this year which is higher than 2.5 percent December forecast. The US Fed expected inflation measure was 1.9 percent at the end of 2018, showing a steady footing from the initial outlook but appears to exceed 2019 target a little bit.