The rate now stands at 2%, up from 1.75%, as widely expected by the industry.
But the Fed’s updated interest rate projections – dot plot – show a more aggressive rate path as officials now anticipate two further 25bps hikes this year, up from one hike in the March projections, another three 25bps lifts in 2019, and one in 2020.
This is a more hawkish outcome than most had anticipated, particularly given the rise in the dot plot for 2018.
Aggressive Fed
Lee Wild, head of equity strategy at Interactive Investor, said the Fed’s more hawkish sentiment is not enough in itself to derail global equity markets, but noted US policymakers are divided over how aggressive the Federal Reserve must be this rate tightening cycle.
“As Fed chairman Jerome Powell (pictured) acknowledges, the risk remains that officials overcook it and bring an end to the Trump trade once and for all. Achieving the ‘not too fast, not too slow’ Goldilocks approach to monetary policy will be key to extending the equities bull run.”
Keith Wade, chief economist at Schroders, does not anticipate the Fed getting carried away.
He said: “In our view, the cumulative effect of higher interest rates and an ebbing of fiscal stimulus should be enough to cause the Fed to pause in its hiking cycle and take stock. We expect the economy to decelerate in the second half of 2019, such that 3% proves to be the peak.
“In the meantime, markets will have to absorb a greater near-term tightening of monetary policy as the Fed takes a step nearer to normalisation.”
BoE left behind
Elsewhere, Richard Carter, head of fixed interest research at Quilter Cheviot, said it is highly unlikely the Bank of England will be able to follow the Fed on its rate hiking path.
He said: “The US economy is firing on all cylinders, small business confidence is at 35-year highs and the Fed now has to guard against the dangers of overheating. The Bank of England would probably like to follow the Fed’s lead and normalise interest rates too but this looks highly unlikely as long as the political disarray continues over Brexit.”
This is a view echoed by Janus Henderson co-head of strategic fixed income Jenna Barnard, who said structural issues and low inflation will hamper other central banks following the Fed on its rate hiking path.
