Federal Reserve hikes rates, policy no longer described as 'accommodative'

The US central bank tightened policy further on Wednesday with policymakers describing economic growth and job increases since they last met in August as "strong".

As had been fully anticipated by economists, the target range for the Fed funds rate was hiked by 25 basis points to between 2.0% and 2.25%.

In its policy statement, the Federal Open Market Committee also no longer described its policy stance as "accommodative".

However, in his presser Fed chief Jerome Powell was quick to explain that that was not a 'signal', going on to note, among other things, how policy-makers had in fact bumped-up their median estimate of appropriate level for interest rates in the 'longer term'.

Inflation meanwhile was described as near the central bank's 2.0% target, both in terms of headline and so-called 'core' consumer prices, with inflation expectations "little changed".

Wednesday's policy statement also showed that the decision among FOMC members to raise rates was unanimous.

Meanwhile, the Summary of Economic Projections published alongside the policy statement showed that policymakers' median projections for unemployment and inflation in 2019 and 2020 were little changed, although their projection for GDP growth in 2021, which was published for the first time on Wednesday, revealed that they expected a slowdown from 2.0% during the year before to 1.8%.

The 'median' forecast for the path of the Fed funds rate out to 2020 was identical to that of June, although central bank officials did lower their range of forecasts for interest rates in 2020 and 2021, although that for 2019 was nudged higher.

So too, their estimate for the appropriate Fed funds rate in the "longer run" was bumped-up from 2.9% to 3.0%.

Thus, the SEP now showed that 12 of the Fed's top 16 officials expected four 25 basis point rate hikes in 2019, although the median projection was still for three tightening moves.

In an immediate reaction, as of 1913 BST the yield on the benchmark 10-year US Treasury note was three basis points lower to 3.07% and that on the interest rate-sensitive two-year note off by two basis points at 2.82%.

The US dollar spot index meanwhile was 0.01% lower at 94.1230 following an initial drop to 93.9540.

ECONOMISTS REACT AND DIVERGE

"Finally, note the one-tenth increase in the Fed’s estimate of the long-run funds rate, to 3.0%. This is not hugely significant per se, but we think there’s a good chance it marks the start of a sustained, slow increase, reflecting the improving productivity picture," said Ian Shepherdson at Pantheon Macroeconomics.

"The downshift in estimates of the neutral rate have been very comforting to investors thinking that the tightening cycle would be relatively short, so a meaningful increase over the next year would not go unnoticed."

Michael Pearce at Capital Economics on the other hand said: "Our view is that the Fed will press ahead with gradual rate hikes for now, but that officials are still underestimating just how quickly the economy is likely to lose momentum next year, as the fiscal boost fades and monetary tightening bites.

"As economic growth slows below its potential rate around the middle of next year, we expect the Fed to call time on rate hikes and ultimately begin cutting rates by early 2020."