News Copy: Fed Raises Rates

with Hans Lee in Sydney

Screen Shot 2017-12-13 at 12.38.03 pm

How the figures say it all. (Source: Bloomberg Intelligence)

The Federal Reserve has decided to raise rates for the third time this year – and economists feel that as many as five more are in the cards for 2018. The new 1.5% cash rate pars that of Australia and remains significantly higher than other central banks including Japan who still has negative rates.

The decision to raise rates comes off a stronger outlook for US growth into 2018 as well as the Republican tax cuts which passed earlier this month.

The Fed has also signalled its approval of the lowest domestic unemployment rate in 17 years as yet more reasons to continue rate hikes and monetary policy normalisation.

The Fed may also have been looking favourably at the lower dollar spot rate. The spot rate is currently hovering near the lows of 2017 YTD and should encourage exports and consequentially, economic growth in 2018.

When coupled with robust job creation figures and stronger business confidence, it has become a clear case to investors that rate hikes will be part of an inevitable normalisation process.

However, not all economists share a consensus on how many rate hikes will come out of the Fed in 2018. Speaking to the Spokesman-Review, David Jones of DMJ Advisors predicts four rate hikes in 2018 with additional growth from tax cuts as a key rationale for the increases. Jones’ rate hikes are on the considerably bullish side of predictions.

Speaking to #WhatMatters, Shane Oliver of AMP Capital agrees with Jones citing four rate hikes himself. However, Mr Oliver said the RBA “won’t just follow the Fed [sic]” but expects the Australian central bank to raise rates once “at the end of 2018”.

Speaking to Bloomberg, Mark Vitner of Wells Fargo contrasted both Oliver and Jones. He said that low inflation should keep the Federal Reserve on notice about any plans for further tightened monetary policy. Vitner said that not even three rate hikes are warranted.

Still to question will be the new Fed Chair’s direction. As Yellen makes way for Jerome Powell, a key dovish ally will take the top chair. While Powell has previously signalled a continuation of Yellen’s slower monetary policy action approach, he has also said that the more resilient financial system gives confidence for continued rate hiking in 2018.

More to come…

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