U.S. Fed hikes federal funds rate to 2.5 pct, likely to hike twice in 2019

As was anticipated widely, the U.S. Federal Open Market Committee decided to hike the target rate for the federal funds rate by 0.25 percentage points to 2.5 percent. This is the ninth quarter-point rise since the end of 2015.

The FOMC’s statements’ characterization of the economy was widely the same from their earlier statement. “The Labor market has continued to strengthen and…economic activity has been rising at a strong rate.” The longer term inflation expectations’ indicators are little changed, on balance.

The Committee stated that some further gradual hikes in the target range for the federal funds rate would be needed. It further stated that the Fed would continue to monitor global economic and financial developments and assess their implications for the economic outlook.

The dot plot shifted lower for next year. The median expectation is now for two hikes in 2019, rather than three indicated in September, noted TD Economics in a research report. The median expectation for the longer-run level of the fed funds also moved down to 2.75 percent from 3 percent.

These lower rate expectations were in line with a modes downgrade to inflation and growth. Compared with the previous Summary of Economic Projections in September, the median forecast for real GDP growth for next year eased to 2.3 percent from 2.5 percent. For 2020, the forecast stayed at 2 percent. Markedly, the expectation for growth over the longer run moved up a bit to 1.9 percent.

The median jobless rate forecast remained the same through 2019, but both 2020 and 2021 were upwardly revised by one tenth, likely reflecting slightly lower growth, said TD Economics. On the inflation front, the median estimate for core PCE dropped a bit to 1.9 percent for this year and was at 2 percent for next year.

“Treasury yields were up slightly in the immediate aftermath of the statement, with market participants perhaps a bit relieved that the Fed is likely to be even more gradual with rate hikes going forward, and therefore less likely to trigger a downturn by hiking too much”, added TD Economics.

At 20:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was bullish at 77.0999. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex