What’s happened?

Markets gave a dull cheer this morning as the US Federal Reserve kept its promise to raise interest rates during its meeting last night. The central bank has taken the next step along the path to monetary policy normalisation, cranking interest rates up by 0.25%. The hike, which brings interest rates to 2.25%, was in line with the Fed’s forward guidance. The move higher was largely already priced in, and the reaction across equity and fixed income markets was muted. The Fed also confirmed that another hike is likely at the December meeting.

 

The statement language represented the continuation of an approach taken by the Fed for several years, although Powell de-emphasised the “accommodative” monetary policy stance in the face of sustained economic expansion and a strong labour market. While Powell mentioned trade wars and emerging markets in the press conference, there was little hint that these events were about to deflect the Fed from its approach to gradually normalise interest rates.

 

 

Views from our experts:

 

Tim Drayson, Head of Economics

The US economy is performing well, aided by the fiscal stimulus which should continue to support growth for the next few quarters, but the Fed forecast for the expansion to persist for several more years in an environment of stable inflation strikes us as optimistic. The Fed will likely have to continue raising rates to contain building inflationary pressure, risking a sharper downturn in their forecast horizon.

 

Ben Bennett, Head of Investment Strategy and Research

This move was fully anticipated by investors, so there’s no immediate market volatility. But it’s yet another ratchet tighter for US dollar monetary conditions, which is coinciding with wider credit spreads this year. The biggest moves have been felt by borrowers of dollars who don’t directly benefit from the strength of US domestic growth – e.g. across parts of emerging markets. And this tightening pressure is likely to continue as the US Federal Reserve keeps hiking.