Fed signals more rate hikes despite emerging market 'stress'

Irving Hamilton
October 18, 2018

As well as making life more hard for USA exporters, a stronger greenback also raises the borrowing costs of many heavily-indebted emerging market economies, such as those in Latin America which have high levels of dollar-denominated borrowing. Based on current economic forecasts, the Fed expects to boost rates once more in 2018, followed by three rate hikes in 2019. "I put a couple of other people there I'm not so happy with too but for the most part I'm very happy with people".

The median view of all Fed officials was that rates should be increased one more time this year and three times next year and a final quarter-point rate hike in 2020. That would put it above the 3 percent level which the Fed now pegs as its "neutral rate".

He says: "My biggest threat is the Fed".

While criticism of monetary policy by a president has become taboo, Trump isn't alone in questioning why the Fed continues to raise rates while inflation remains tame.

Meanwhile, the Fed took notice of clouds forming on the horizon. Auto loan rates are at a nine-year high, and 30-year fixed mortgage rates recently climbed to their highest level in seven years.

Furthermore, "some" at the meeting said that risks grew as the United States economy increasingly outpaces its rivals' more sluggish growth "because of the potential for further strengthening of the dollar".

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Stronger US currency makes American exports more costly to foreign buyers, possibly weighing on growth, and makes many debt payments more costly for foreign borrowers.

"For now, the Fed has made it clear that they are focused on their agenda despite rising presidential pressure on their rate decisions", said Mike Loewengart, vice president of investment strategy at E*Trade.

The White House has put punishing tariffs on more than $250 billion in annual Chinese imports.

The minutes from the meeting showed every Fed policymaker backed raising interest rates, pushing the dollar index to its firmest in a week and knocking emerging currencies that had befitted from a return of carry trade action.

Wall Street, which had struggled through much of the day, closed slightly lower, with stocks paring losses after the minutes' release.

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