Fed Raises Rates For Third Time In 2017

Federal Reserve chair Janet Yellen

Federal Reserve chair Janet Yellen

The Federal Reserve has raised rates for the third time from a range of 1% to 1.25% to a range of 1.25% to 1.5% at its last meeting for the year.

The meeting of the Federal Open Market Committee (FOMC) was the penultimate meeting for chairman Janet Yellen who will step down in February and be replaced by Jerome Powell. 

Rates were moved from a range of 1% to 1.25% to a range of 1.25% to 1.5%, although this had been largely priced in by markets.

The move brings interest rates to the highest level since the fall of Lehman Brothers and is the fifth hike in Yellen's tenure.

This makes the third time the Fed has raised rates this year and indicates the central bank has stuck to its "dot plot" of three rises in 2017. 

She was sceptical about the impact of President Trump's tax cuts, saying it would likely have a modest rather than a "gigantic" increase in growth.

Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said: "It is clear that the Fed does not think that Trump's tax cuts will give a substantial long run boost to growth. This is about as close as the Fed will get to saying the policy was mistimed.

"Yellen can leave the frontline of central banking with her head held high. Her tenure has corresponded with a big drop in unemployment, solid growth and the start of the great unwinding of QE."

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However, markets were unsure if rate rises would happen at a similar pace next year. Yellen said the pace of rises would remain "gradual" next year, particularly as inflation remains below its target of 2% in the US.

Charles St-Arnaud, senior investment strategist at Lombard Odier Investment Managers, said: "We continue to expect three hikes next year - this is still more aggressive than the current market expectations of a little less than two hikes next year.

"We believe the risk for the market mainly lies in its lack of belief in the FOMC's capacity to hike rates in 2018. At some point, likely next year, a convergence between market expectations and the FOMC will be needed, in our view. This could have some big implications for the rates market and the USD."

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David Kohl, currency strategist at Julius Baer, said: "Last time the FOMC published its dot plot projection, which represents the appropriate level of Fed funds rates according to the majority of the FOMC members, three additional rate hikes for 2018 were envisaged.

"Financial markets expect a less aggressive rate hiking path in 2018 and are matching our own view, expecting just two more rate hikes in 2018."

Olivier Marciot, investment manager on Unigestion's multi-asset Navigator fund, added: "As expected the Fed hiked interest rates today to 1.50%, their highest level since the fall of Lehman Brothers and the financial crisis.

"This is a strong signal we are now entering a new era, in which the Fed believes that growth is sustainable enough to bring monetary policy back to 'normal' levels.

"Growth projections in the US have now been raised to 2.5% for 2018, while unemployment is predicted to fall to 3.9%. Yet what still remains a 'mystery' to central bankers, and what investors must be wary of, is when inflationary pressures will fall back into line."

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