Fed raises interest rates in Powell's debut

Federal Reserve Board Chairman Jerome Powell Saul Loeb  AFP  Getty Images
Federal Reserve Board Chairman Jerome Powell Saul Loeb AFP Getty Images

25 March, 2018

MSCI's broadest index of Asia-Pacific shares outside Japan ended nearly flat, A 1 percent drop in Chinese and Hong Kong stocks offset gains elsewhere.

There was no indication of the size and scope of the tariffs, which U.S. Trade Representative Robert Lighthizer said on Wednesday would target China's high-technology sector and could also include restrictions on Chinese investments in the United States.

Powell says Fed officials haven't lowered their economic growth forecasts because of the Trump administration's moves to impose tariffs on steel and aluminum imports. It gained $1.63, or 2.6 percent, on Wednesday.

Before the meeting, analysts were split over whether the Fed, which is wary of an early misstep under its new leadership, would raise policy tightening expectations until more price pressures are clearly evident. Rates are still historically low.

The U.S. unemployment rate by the end of 2018 is expected to edge down to 3.8%, indicating the Fed sees more room for the labor market to run.

Fed policymakers now expect the unemployment rate to drop to 3.6 percent by the end of next year, down from their previous estimate in December of 3.9 percent and far below the current rate of 4.1 percent.

The price-to-earnings ratio of the Shanghai index was 14.84 as of the last full trading day, while the dividend yield was 2 percent. The 10-year yield fell below 2.85 percent, its biggest move in three weeks. Some economists expected the Fed would signal a fourth hike this year.

Stocks in China and Hong Kong fell on Thursday as investors digested the impact of a rate hike by the U.S. Federal Reserve and as concerns over a potential trade war between the world's largest and second-largest economies intensified. The decision will be released at 2:00 p.m.

In its first policy meeting under new Fed chief Jerome Powell, the USA central bank indicated that inflation should finally move higher after years below its 2% target and that the economy had recently gained momentum.

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

USA stocks are mixed Wednesday morning as investors wait for news on interest rates from the Fed.

FED RATE HIKE: The Fed, headed by its new chairman, Jerome Powell, said the US economy and the job market continued to improve over the last two months and it still expects to raise interest rates three times this year.

Policy makers also maintained their inflation outlook of 1.9%, slightly below the Fed's target.

The US dollar was on the defensive on Thursday after posting its largest loss in two months when the Federal Reserve turned out to be less hawkish than anticipated. The central bank raised rates modestly three times in 2017 under Powell's predecessor, Janet Yellen, whom he succeeded last month.

The Fed is set to announce its first interest rate increase of the year, a testament to the continued strength of the economy and of the job market in particular.

SEB Research discusses its reaction to today's FOMC March policy statement and to the Fed new economic projections.

The yuan was quoted at 6.319 per US dollar, 0.15 percent firmer than the previous close of 6.3284.

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