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As Fed Raises Interest Rates, Emerging Markets Aren't Following Suit

24 Marcha 2018, 10:37 | Dolorita Barahona

Welcome to the hot seat

Welcome to the hot seat

The U.S. Federal Reserve raised interest rates on Wednesday and forecast two more hikes for 2018, based on board members' median projection. "Several factors are supporting the outlook: Fiscal policy has become more stimulative; ongoing job gains are boosting incomes and confidence; foreign growth is on a firm trajectory; and overall financial conditions remain accommodating".

If the Fed does stick with its new forecast for three rate increases this year and three in 2019, its key policy rate would stand at 3.4 percent after five years of credit tightening.

The United States central bank increased lending rates by 25 basis points on Thursday amidst market turmoil all over the world. Borrowers, however, face higher costs when they try to get a mortgage, auto loan or small business loan.

Credit cards with fixed interest rates and annual percentage rates that don't change for a set period of time won't be immediately affected. At the same time, it increased its estimate for rate hikes in 2019 from two to three, reflecting more optimistic expectations for growth and low unemployment.

In his first meeting a Chair of the Federal Reserve Jerome Powell took control. In his remarks, Powell also noted that a number of FOMC members reported that businesses are concerned by the change in U.S. trade policy. The average national savings account interest rate was 0.6 percent before the Fed began raising rates in 2015, according to FDIC data.

The latter comment was enough to trim inflation-linked "breakeven" Treasury rates, but the broader market was less convinced.

US crude CLcv1 fell 1.41 percent to $64.25 per barrel and Brent LCOcv1 was last at $68.90, down 0.82 percent on the day. The Fed asserted that part of the deviation from 2 percent reflects unusual price declines that occurred almost a year ago. The unemployment rate is expected to drop to 3.6% in 2019. Even in the boom of the late 1990s, the jobless rate reached 3.8 percent for only a single month and never fell below that level.

Officials' growing optimism tracks with the expectations of many Wall Street analysts.

USA economic strength is evident with the unemployment rate at a 17-year low and companies receiving windfalls from President Donald Trump's tax cuts, which they may reinvest to create jobs and improve wages. "I would imagine the bar is higher for him in the shorter term because he is not a trained economist", unlike Janet Yellen and other predecessors.

A portion of the voting membership of the committee rotates every year among the Fed's regional bank presidents.

The British pound hit a 1-1/2-month high of $1.4171, building on Wednesday's one-percent gains. "Today, with head winds shifting to tail winds, the reverse could hold true".

The moderate path is partly a result of the heavy inertia holding back inflation Fed officials see in the economy. In January, officials described economic activity and job growth as "solid".

The Federal Reserve said the 0.25% change was being made to reflect a strengthened economic outlook. His Fed would take the "middle ground" he noted, and he was "surprised" that wage growth was so modest.

"Markets are saying that these tariffs are going to cut into the global growth story that looked pretty strong just a few weeks ago". This article is strictly for informational purposes only.



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