Powell Marks Start Of Fed Tenure With Rate Rise; Warns Asset Prices Are 'elevated' In Some Areas

At the two-day meeting, the Federal Open Markets Committee (FOMC) voted unanimously to raise the Federal Funds target range from 1.25%-1.5% to the 1.5%-1.75% band, in light of a strengthening economic outlook in recent months.

In a statement, the FOMC said it expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong.

Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Fed's 2% objective over the medium term.

The FOMC commented: "Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

"In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4%. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2% inflation."

Despite speculation the FOMC may have used this month's meeting to signal an extra rate rise this year, its projections for 2018 remain at three in total, the same number as in 2017.

However, its forecasts point to an extra increase in 2019 to three in total and it now sees terminal rates at 3.4% in 2020 as opposed to 3.1%.

Its median estimate for economic growth in 2018 also rose to 2.7% from 2.5% in December, while its 2019 estimate increased from 2.1% to 2.4%.

According to Reuters, following the announcement stocks extended their gains, while the dollar fell. Treasury yields initially rose before falling back.

Powell took over the role of Fed chairman in February after his predecessor Janet Yellen stepped down after four years.

In his first press conference following an interest rate decision, Powell also noted "in some areas, asset prices are elevated relative to their long run historical norms".

"You can think of some equity prices. You can think of some commercial real estate prices in certain markets. But we don't see it in housing, which is key," he said.

But he said the overall financial system only faced "moderate vulnerabilities", noting there was not the high leverage or excess risk-taking at the levels seen before the 2007-8 financial crisis.

Powell also referred to concerns about the impact of US President Trump's recent move to push ahead with proposed tariffs on steel and aluminium imports, reigniting fears of a global trade war. 

The Fed chair said the issue had not caused officials to change their economic outlook yet, but future expectations will depend on how the situation unfolds.

"A number of participants in the FOMC did bring up the issue of tariffs...but there is no thought that changes in trade policy should have any effect on the current outlook".

However, he added that a number of members reported conversations with business leaders around the country, who were concerned about the impact of trade policy on growth. 

Commenting on the Fed's decision, Michael Metcalfe, global head of macro strategy at State Street Global Markets, said: "Tightening was expected, but the devil was in the dots. The upward revision to growth forecasts was not a surprise, but given low levels of inflation, the additional hikes forecast for 2019 and beyond was more hawkish than anticipated.

"With the unemployment rate now firmly below its long-run equilibrium, the implication is that the Federal Reserve (Fed) needs to normalise rates at a gradual and regular pace. Perhaps most disturbing for the market is moving up the long-run projections of the Fed funds rate, as that will cast doubt as to where rates will eventually peak if the economy proceeds along the path the Fed has projected."             

Tim Foster, fixed income portfolio manager at Fidelity International, added: "The message in a nutshell is that data, so far, is still not strong enough to justify a faster hiking cycle this year. Further down the line, however, things are looking brighter, with either lingering slack or a long-awaited pick-up in productivity that will keep inflation under control.

"This is by all means a "hopeful" Fed that is shifting away from the data-dependent approach that Janet Yellen got us used to. In our view, however, something will eventually have to give, and the Fed's confidence in their ability to stay on the rate path they set may soon be tested by either the economy or the market."