In a move that is likely to earn the wrath of the U.S President Donald Trump, the Federal Reserve on Wednesday (19 December) raised its benchmark interest rate by 25 basis points (0.25 percent), The Wall Street Journal has reported.
The Federal Reserve, under chairman Jerome Powell, unanimously decided to raise the policy rate at this week’s meeting of the Federal Open Markets Committee, resisting Trump’s repeated warning that doing so would completely derail the bull market he has presided over since taking office.
The policy rate is the overnight rate at which banks lend to one another . It is one of the main instruments available to the Fed to achieve its mandates of maintaining price stability and to maximising employment.
The Fed has now increased rates by 25 basis points four times this year in a bid to tighten U.S. monetary policy. It represents a decisive departure from its policy of historically low interest rates which had been maintained since the financial crisis of 2007. The Fed however announced that it plans to raise rates only twice in 2019 — reducing their original projection of three rate increases over the course of the year.
The Wall Street quoted the Fed Chairman Jerome Powell as saying that central-bank officials still expect healthy growth and a “robust economic backdrop” in the coming year while also adding, “We have seen developments that may signal some softening, relative to what we were expecting a few months ago.” The Fed Chairman may have been alluding to major economies in the world beginning to show signs of stagnation and increased financial-market volatility that is less supportive of sustained growth.
Trump has been haranguing the Fed in the days leading up to the rate-hike announcement, openly accusing its officials of jeopardising a U.S. economy that is currently a standout performer with strong economic indices.
It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!— Donald J. Trump (@realDonaldTrump) December 17, 2018
Trump even called actions of Powell, his own appointee, as “crazy”. He described the Fed’s policy was “the “biggest threat” to the US economy, larger than the administration’s trade dispute with China.
Yesterday, Trump endorsed a Wall Street Journal editorial that called for a pause in rate hikes, arguing that US growth may be slowing.
I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!— Donald J. Trump (@realDonaldTrump) December 18, 2018
U.S economic indicators have shown strength with growth at 3 percent and the unemployment rate at a historic low. But softening of inflation in recent months, and plunging oil prices may have reduced the Fed’s sense of urgency about raising rates to prevent the economy from overheating.
Following the announcement by The Fed on raising interest rates, the US stock market plunged to its lowest this year. Dow Jones industrial average dropped 70 points after the announcement to finish the day down 1.49%, while the S&P 500 lost 39.2 points, or 1.54%.