Defying pressure from the US President Donald Trump to pause rate hikes, the US Federal Reserve raised interest rates by a quarter-point on Wednesday, thus taking the target range for its benchmark funds rate to 2.25 per cent to 2.5 per cent. This marked the fourth increase this year and the ninth since it began normalising rates in December 2015.
The S&P 500 dropped as much as 2.3 per cent, having been up 1.5 per cent before the Fed decision. At the closing bell, it was down 1.5 per cent, marking the most negative stock market reaction to a Fed rate rise since February 1994 — a year in which the Fed boosted rates by a cumulative 2.5 percentage points.
The fed acted after an extraordinary pressure campaign by President Trump, who fears further rate hikes will undermine the U.S. economy, which could in turn cause him political challenges.
Chairman of the Federal Reserve Jerome Powell comments that the central bank would continue to reduce the size of its balance sheet at the current pace and it will keep hiking rates if data is justified.
Trump VS Powell
Earlier this month, Trump said ‘I think it would be foolish’ for the Fed to raise rates. In late November, he told the Washington Post he was ‘not even a little bit happy with my selection of Jay,’ in reference to Powell. He added: ‘They’re making a mistake because I have a gut and my gut tells me more sometimes than anybody else’s brain can ever tell me.’ He complained in October: ‘I think the Fed has gone crazy.’
Powell got asked repeatedly about Trump’s extended public push to hold off on further rate increases.
‘Political considerations play no role whatsoever in our discussions or our decisions about monetary policy,’ Powell told reporters just minutes after the Fed announced its rate hike.
‘We’re always going to be focused on the mission that Congress has given us we have the tools to carry it about. We have the independence which we think is essential to be able to do our jobs in a non-political way,’ he continued.
Then, the central banker insisted in stark terms: ‘We at the Fed are absolutely committed to that mission, and nothing will deter us from doing what we think is the right thing to do.’
In addition to the increase of 25 basis points, the fed signaled there could be two further rate hikes during 2019, when three had been anticipated – meaning there could be two more opportunities for presidential heartburn about the Fed’s policy.
Interest rates rise. So what?
A rise in interest rates will impact consumer borrowing on a number of fronts. As interest rates rise, more people borrow less money. This results in consumers save more and spend less. With less disposable income being spent, the economy slows down and inflation decreases.
The Fed has a broadly bullish assessment of the economy’s performance. “Since September, the US economy has continued to perform well, roughly in line with our expectations,” said Mr Powell. As such, Mr Powell said that policy no longer needed to be supportive of the economy.
“They don’t recognise how bad the markets are and that is what you are seeing,” said Andrew Brenner, head of international fixed income at National Alliance Securities. “I am very concerned.”