FOMC announcement: Fed keeps interest rates steady

12 November, 2018, 15:57 | Author: Eric Barnett
  • Increased inflation concerns loom ahead of Fed's committee meeting

United States stocks, which had rallied broadly on Wednesday after the results of the congressional elections, turned lower as the Fed's statement offered no indication the central bank might slow the pace of its rate increases.

In December, traders will focus on fresh Fed forecasts that could signal a change to its growth outlook or to its consensus view that three rate hikes will likely be needed in 2019.

Labour market conditions are tightening with fewer available workers around to fill a large and increasing number of vacant positions.

On the upside, the committee noted that the unemployment rate "has declined" since the September meeting. Unemployment is at 3.7%, the lowest in 48 years, and wages are rising.

Policymakers, however, took particular note of the moderation in business investment.

Despite a US trade war with key nations, weaker corporate investment and a sluggish housing market, the Fed is showing confidence in the economy's resilience.

Michael Pearce, senior USA economist with Capital Economics, thinks that would be followed by two more rate hikes in the first half of 2019.


If Jerome Powell, the Fed's chairman, sounds calm about inflation, the markets will rally. That would push the short-term rate closer to 3%, which is where most officials expect rates to settle out when the economy is at its long-run equilibrium-a so-called neutral level.

This will be the last meeting without a formal press conference with Powell. Higher interest rates can make equities less attractive investments.

At 2:35PM ET, the Dow Jones Industrial Average fell 48.62 points, or 0.19 percent, to 26,131.68, the S&P 500 lost 13.12 points, or 0.47 percent, to 2,800.77 and the Nasdaq Composite dropped 51.31 points, or 0.68 percent, to 7,519.44.

"The latter would lead to a pause in the Fed's hiking cycle". The market pullback received no mention in the Fed's statement, unlike earlier downdrafts in 2015 and 2016. Officials are equally split over whether to raise rates two, three or four more times next year. The September projections indicated at least one more hike in 2020, which the market also does not see.

Investors widely expect policymakers to keep the target range steady for the federal funds rate, after officials at the US central bank raised it in September for the third time this year.

Market participants have been watching the IOER rate, as it is used as a guide for the funds rate.

The central bank is allowing a capped level of $50 billion in proceeds to run off each month from the portfolio of bonds it purchased during its efforts to stimulate the economy.

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