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Fed hikes rates: What it means to D-Street, rupee & RBI's policy rate

The Fed also dropped the word “accommodative” from the policy statement.

Sep 27, 2018, 08.06 AM IST
NEW DELHI: Sticking to its script, the US Fed on Wednesday raised interest rates by 25 basis points and signalled another hike in December and three more in 2019.

The Fed also dropped the word “accommodative” from the policy statement, released after the two-day meeting, suggesting that the central bank may pause at some point to access impact of rate hikes on the US economy.

US President Donald Trump slammed the move, saying he was not happy about the rate hike. Fed chair Jerome Powell said the central bank was simply focusing on its mandate.

The US central bank has now lifted interest rates by eight times since 2015, and rates are at their highest levels since October 2008, just after the collapse of Lehman Brothers.

“In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range for the federal funds rate to 2 to 2.25 per cent,” Fed policy statement said.

Reacting to the policy move, the US stocks gave up all gains in the last 30 minutes of trade to end lower. US treasuries and dollar ended higher.

Here’s all you need to know from the Federal Reserve’ policy review:

Impact on Indian market
Investors on Dalal Street have already discounted the expected Fed rate hike. The stock market on Wednesday traded in a capped range ahead of the decision.

However, market experts believe the tightening by the US central bank may force the Reserve Bank of India to hike interest rates. “The Fed rate hike will further strengthen the dollar, and thereby put further pressure on the rupee. Rising crude oil prices, as well as interest rates will lead to an outflow of foreign money. Indian market may see some short-term pressure ahead of the forthcoming elections,” AK Prabhakar, Head of Research at IDBI Capital, said earlier this week.

Nifty futures on Singapore Exchange traded with mild gains this morning, signalling positive sentiment on Dalal Street.

Why Fed dropped the ‘A’ word
The Wednesday’s policy was significant as the apex bank dropped long-standing description of its monetary policy as “accommodative”. “This change does not signal any change in the likely path of policy,” Jerome Powell told reporters.

The Fed inserted no substitute language for the dropped ‘accommodative’ wording in its statement. That wording had become less and less accurate since the central bank began increasing rates in late 2015 from a near-zero level, and its removal means the Fed now considers rates near neutral, Reuters said.

Fed’s view on US economy
The Fed sees the economy growing at a faster-than-expected 3.1 per cent this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2 per cent target, Reuters reported.

"The labour market has continued to strengthen ... economic activity has been rising at a strong rate," the Fed said in its statement.

Future rate hikes
Interest rates futures traders stuck with the projection that the Fed will hike interest rates in December, but expected two more hikes next year in contrast to Fed's estimate of three.

“The higher pricing in the contracts was not large enough to alter traders’ expectations for a Fed rate hike in December, which would bring it to a target range of 2.25 percent to 2.50 percent. It implied traders expect two more rate increases in 2019” Reuters reported.

Trump’s reaction
Fed Chairman Powell in the press conference said that policymakers haven't been affected by political considerations. However, the central bank was again at the receiving end of the US President Donald Trump after the central bank raised interest rates for the sixth time under the current administration.

“We’re doing great as a country. Unfortunately they just raised interest rates because we are doing so well. I’m not happy about that,” Trump told a press conference.

Rate hikes to pause in 2021?
While the Fed raised projections for expansion this year and next, they predicted that growth would slow to 1.8 per cent by 2021, Bloomberg said.

The new rate hike projections included the first numbers for 2021, when officials see rates remaining steady at 3.4 per cent.

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