Published: Sat, April 07, 2018
Money | By Michele Stevens

Fed Hikes Interest Rate, Its First Under New Chief Powell

Fed Hikes Interest Rate, Its First Under New Chief Powell

Newly appointed chairman of the Fed, Jerome Powell, announced the news in his first meeting with other central bankers.

Put another way, he's aiming for the central bank's fabled "soft landing", a goal the Fed has arguably never achieved.

With this latest increase in interest rates, trucking companies with floating or variable interest rates may want consider refinancing into a fixed-rate loan, according to Anthony Sasso, head of TD Equipment Finance at TD Bank.

The dollar struggled against its peers on Thursday after the Federal Reserve maintained the view that it would raise interest rate three times in 2018 instead of the four that some currency bulls had hoped for.

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The US dollar extended losses in Asia yesterday after the Fed stuck to its target for interest rate hikes this year, but fresh fears of a trade war hit equity markets as US President Donald Trump prepared fresh sanctions on China. The Fed said overall inflation was below 2 percent and expects it to stabilize around the 2 percent mark over the medium term.

Currently, US inflation is running at 2.2% (for the year to February) which is slightly above the Fed's target of 2%. Fed officials predicted the rate also would settle even lower at 4.5 per cent in the longer run.

In December, the Fed predicted USA gross domestic product (GDP) to grow 2.5 percent this year, 2.1 percent in 2019 and two percent in 2020. The magnitude of the impacts on global capital flows, business fixed investment, productivity, exchange rates, and inflation are all very hard to gauge, making the Fed's job very challenging in 2018.

Powell justified the Fed keeping its inflation forecast the same by noting that price pressures have been weak for years. "Like any set of forecasts, those forecasts will change over time", he said.

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"We are trying to take the middle ground here", Powell stated, adding that there are no signs that the economy is on the cusp of accelerating inflation. He also said he was surprised that wages did not further rise. Inflation has been soft since the end of the Great Recession in mid-2009 and it's still quite low by historical standards. Fed officials also increased their expectations for GDP growth in 2019 to 2.4% from 2.1% in December a year ago. The Fed started out at 4.25% six years ago and it's ratcheted down its forecast to a recent low of 2.8%.

U.S. 10-year Treasury yields climbed to hit a one-month high while the dollar dropped against a basket of major currencies. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth.

"Investors might be wise to focus more carefully on a potentially bigger driver of interest rates - changes in real yields", Hyman told ETF Trends. He also noted that there's growing concerns about a trade war hurting the USA economy.

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