U.S. Federal Reserve Announces Interest Rate Hike: Accommodative Stance Ends

US Federal

The U.S. Federal Reserve concluded its two-day meeting on September 26, 2018 with announcing a rate hike of 25 bps or basis points which was in line with the expectations of the broader markets. As a result of the hike announced, the federal funds rate target range stood at 2-2.25%. The Fed raises the rates when it expects the broader economy has been witnessing a robust performance and in order to check inflation. The overall business environment, employment numbers and other macro-economic variables are the primary determinants which affect the Federal Reserve’s decision of interest rates.

The raising of the interest rates reflects that the Federal Reserve would continue to tighten the monetary policy and the meeting also reflected a hawkish stance. According to the meeting, the Fed reflected that the strong momentum would continue for minimum three more years. It is expected that the US Federal Reserve would be announcing one more hike when it meets in December thus, ending the year with a total of four rate hikes. However, the central bank is likely to announce three hikes in 2019 and one hike in 2020.

It seems like the Fed is of the view that the US economy is in a position to handle the rate hikes. With the rate hike, the monetary policy would no longer be “accommodative.” According to Jerome Powell, Chair, Federal Reserve, the monetary policy is on a path on which it should be.

The US stocks started the trading session on a positive note. However, later on, they witnessed the downward momentum. In addition, the financial as well as banking stocks witnessed the adverse impacts. According to the Federal Reserve, the US economy is witnessing a strong momentum and is growing faster than it was anticipated. For the next three years, the Federal Reserve doesn’t see any concerns which could impact the overall economy. This strong momentum would likely be supported by stable inflation as well as lower unemployment levels. The Fed believes that the overall economic activity is witnessing a strong momentum and the labor market is also witnessing a boost. 

However, according to the US President Donald Trump, the positive impacts of its protectionist policies are getting offset by the Federal Reserve’s decision of hiking the interest rates. The President seems to criticize the move taken by the Federal Reserve. According to the US President, the Federal Reserve should help him in boosting the economy and should use other methods which could prove beneficial for the overall economic activity. The US President’s move of tax cuts helps in boosting the overall growth which might lead to higher inflation and as a result the Federal Reserve came up with its third hike for the year.

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