US Federal Reserve raises rates

The Fed moves to increase interest rates because the US economy is still strong.

US Federal Reserve Building Source: Bloomberg

The US Federal Reserve has decided to raise rates for 2019 and Wall Street is not pleased. Stocks have already fallen after the US central bank has voted to increase interest rates.

The Fed gradually increases rates

The Fed has decided to raise rates for the fourth time this year. The bank has increased its target for benchmark funds from 2.25 to 2.5%.

In its winter meeting, the US Federal Open Market Committee (FOMC) noted that some increases in rates will be needed as the economy is still steady.

'The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2% objective over the medium term,’ said the statement.

Defying Trump and looking to the future

Though US President, Donald Trump, demanded on Twitter that the Fed keep rates neutral to help the stock market, Federal Reserve Chair, Jerome Powell, stayed independent, only looked at economic factors, and raised rates.

Powell denied that he was influenced by Trump's tweets about the Fed.

'Nothing will deter us from doing what we think is the right thing to do,' said Powell.

The news is a mixture of hawkish rate increases and dovish look at inflation over the next few years. The Fed projects to only raise inflation 2% above target in 2020 and 2021.

Financial experts like,Quincy Krosby, from Prudential Financial said the economy has to remain bullish to justify the two rate hikes planned for 2019.

‘The Fed still sees a solid underpinning for the economy based on the numbers and still sees the viability of two rate hikes next year. The market needs, for the Fed's statement to prove correct, an unequivocally strong parade of strong economic data for that forecast to hold’, said Krosby.

Why Wall Street hates rate hikes

While the Fed may feel that the economy can handle rate increases, the US stock market disagrees. Growth in interest rates could lead to bigger mortgage interest rates, which can depress the housing market and further slow down the economy next year. It remains to be seen how this latest move will influence Wall Street in the future.

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