Fed orders quarter-point rate hike at first meeting under Powell

Canadian dollar weekly graph

The Federal Reserve has voted to raise U.S. interest rates by 25bps in Jerome Powell's first meeting as chairman since taking over from Janet Yellen. "Upward pressure on treasuries should increase and mortgage rates could see more upside in Q2 following the recent leveling off in rates". He was referring to the fact that the Fed said it also meant to raise rates in 2019 and 2020.

Interest rates are going up.

Taken together, the Fed's actions and forecasts Wednesday suggest a belief that the economy remains sturdy even almost nine years after the Great Recession ended. The US jobless rate held at 4.1 per cent in February, equal to its lowest since the tech boom, while payroll employment expanded by a robust 313,000. The Fed expects inflation, which has run below its 2 percent target for six years, to stay at 1.9 percent this year and then rise to 2 percent in 2019. In his first meeting as Fed Chairman, Jerome Powell made a decision to have his cake and eat it, too: He sounds upbeat, tough, and hawkish about next year but cautious about this year.

Bond yields and stocks slid after the Fed's widely expected announcement. Republican tax cuts and a deal on Capitol Hill to boost limits on spending are set to deliver a major short-term stimulus; the $1.5 trillion tax cuts should on their own add half a percentage point to growth this year and next, according to Fed governor Lael Brainard. A sharp rise in wage growth reported in the government's January jobs report triggered fears that higher labour costs would lead to higher inflation and, ultimately, to higher interest rates.

U.S. indexes lifted following the announcement, with the Dow Jones rising as much as one per cent. Companies that seek expansion or carry a lot of debt could suffer with additional hikes by the central bank.

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Simeon Hyman, Head of Investment Strategy at ProShares, told ETF Trends that Powell expressed a slightly more hawkish policy stance today with perhaps one extra hike over the next couple of years, and an indication that inflation might make it just past the Fed's 2% target to 2.1% next year. The U.S. economy is on track to expand 2.7 percent this year and 2.4 percent in 2019, Fed officials now say, a jump from the prior projection done before the Republican tax cuts were finalized.

However, the Fed now projects three rate hikes in 2019, up from the previous projection of two. But he said trade policy "has become a concern" for business leaders a round the country.

Mr Powell said some Fed members are anxious about the possibility of a trade war, referencing conversations between central bankers and business leaders.

There was "no change to 2018 and I think that's why you have such a muted reaction", said Aaron Kohli, an interest rate strategist at BMO Capital Markets in NY.

In its statement, the Fed said the labor market "has continued to strengthen and that economic activity has been rising at a moderate rate".

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