United States futures rise after Fed raises rates; European Central Bank holds rates steady

Andrew Cummings
December 16, 2017

The Fed also said on Wednesday it expected the nation's unemployment rate would fall to 3.9 per cent next year and remain at that level in 2019, well below what is considered to be full employment. Those rates are far below the 3 percent to 4 percent growth that the Trump administration insists would result from its economic policies of tax cuts, deregulation and stricter enforcement of trade laws against unfair foreign imports.

The Fed's action was approved 7-2, with Charles Evans, president of the Fed's Chicago regional bank, and Neel Kashkari, head of the Minneapolis Fed, voting no.

Traders of U.S. short-term interest rate futures kept bets the Fed would raise rates only twice next year. Though Yellen's term as chair ends in February, she will largely be expressing the views within the wider Fed rate-setting committee.

At a news conference after the Fed's meeting, Yellen said she would work to provide a smooth transition for Powell. "There might be a central banker or two that might go in that direction".

"It shows at least some members of the Fed don't see any reason to keep hiking rates in an environment where the economy is growing more strongly but certainly not overheating and where inflation hasn't become a problem and doesn't look like it is going to be one", said Kate Warne, investment strategist at Edward Jones. But steady economic growth and low unemployment suggested it should act.

The poll was taken on Wednesday after the Fed raised key short-term rates by a quarter point to a range of 1.25-1.50 percent, marking the third rate hike in 2017 and the fifth one that started two years ago.

Fed Chair Janet Yellen says the prospect of tax cuts has been built into Fed forecasts for some time, and the central bank does not expect a major boost to growth. The group led the market's decline again Thursday, with the index sinking as much as 1.3 percent. That's what the Fed considers healthy for the economy.

"It's very important to watch it and, if necessary, rethink", Yellen told reporters on Wednesday, referring to the Fed's inflation miss.

At his Senate confirmation hearing last month, Powell impressed his listeners as an evenhanded moderate who favored the kind of incremental stance toward rate hikes that both Yellen and her predecessor, Ben Bernanke, embraced. She noted that any wage growth would likely stem from the low unemployment rate, rather than the tax cuts. But the president has also expressed a desire to pull back on numerous regulations that were imposed on banks after the 2008 financial crisis.

In the litany of reasons that explains why US consumer price inflation has stalled, the drop in clothing prices last month, which was the largest in 20 years, takes its place alongside cheap cellphone contracts, one-off declines in drug prices and cheap gasoline, among others.

This is the third time this year the Fed has raised rates, and the fifth since it slashed the rate to almost zero during the financial crisis of 2008 and 2009.

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