US Stockmarkets Fall To One-year Lows Despite Fed Rate Hike

As markets had anticipated, the Federal Open Market Committee (FOMC) increased the funds rate to between 2.25% and 2.5%, however it lowered its expectations from three rate rises in 2019 to two.

Despite the lowering of 2019 hike expectations, the Fed retained its comment that it would see "further gradual" rate rises.

The FOMC said in the statement: "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 labour market conditions, and inflation near the committee's symmetric 2% objective over the medium term."

The projections sent US stock markets to one-year lows with the Dow Jones falling 1.5% to 23,323 points, its lowest since November 2017, while the S&P 500 shed 1.4% to 2,510 points, its lowest since September 2017.

The move went against US President Donald Trump, who has pressured the central bank over the past few months to not increase interest rates.

In an interview, Trump laid into the Fed's policy decisions in an interview with Fox News on 10 October, labelling the central bank as "loco".

On Monday, he said: "It is incredible the Fed is even considering yet another interest rate hike".

This is the central bank's ninth rate hike since it began its current tightening cycle in December 2015.

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Antoine Lesné, head of EMEA strategy and research for SPDR ETFs, at State Street Global Advisors commented: "Despite political pressure, waning economic momentum globally, and little inflation pressure, the conditions were sufficient to keep autopilot for this hike.

"This backdrop however makes the next steps potentially more complicated for the Fed as the market recently started to price only one further increase in 2019.

"It is likely that the Fed will remain cautious and guidance will be even more data dependent. Given the current backdrop yields may remain around the recent levels and the dollar a bit softer."

M&G: Yield curve inversion may signal need to cut US rates again in near term

Melanie Baker, senior economist, at Royal London Asset Management, said: "The signals sent in the statement and forecasts were not as dovish as we had expected, i.e. only making a small adjustment to their language around "further gradual" hikes (by adding the word "some"). 

"A more cautious signal from the Fed could have been justified (and would have been welcomed by equity markets) given the tightening in financial conditions and weaker global growth backdrop.

"However, the domestic economic data has looked strong enough to suggest that we are not at the peak of the rate cycle quite yet.

"We have pencilled in two more rate rises next year from the Fed which would be in line with what the FOMC's economic projections now signal;  the US economy continues to outperform, labour markets look tight and pay growth has been rising.

"However, tighter financial market conditions and signs of some loss of momentum in the US economy, suggest a reasonable chance that the Fed will take an extended pause sooner than expected."