The fed raised the benchmark rates for the second time in three months

The fed raised the benchmark rates for the second time in three months

The fed’s two-day meeting took the decision to raise the Federal funds rate by 0.25 PP to the range of 0.75–1%. This is the third rate increase since December 2015, when the regulator raised its standing with nine years of record minimum level at 0-0. 25% (second time a year later). Every time the rate grew by 0.25 percentage points

The fed has kept growth forecast of the economy in 2017 at 2.1%, the forecast for inflation dynamics remained at the level of 1.9%, the forecast for unemployment is 4.5%. The forecast for 2018 by the U.S. GDP growth improved to 2.1% expected in December 2%, inflation expected at 2%, the unemployment forecast remains at 4.5%.

Predictable solution

The Committee’s decision brought no surprises for the market: macroeconomic statistics for February exceeded expectations, and fed officials in recent months have repeatedly given signals about raising rates in the near future. As shown by recent surveys by Bloomberg and Reuters, experts almost unanimously predicted a rate hike by 0.25 percentage points in March. The possibility of increasing the bets they’ve placed in quotations.

Us stock indices reacted to the fed’s decision with a slight growth: the Dow Jones industrial average rose 0.5%, to 20950,1 points, the index high-tech NASDAQ companies — 0.7%, to 5900,1 points, the index of wide market S&P 500 0.8% to 2385,3 points.

The economy did not disappoint

The main driver for the tightening of monetary policy are growth in the number of jobs and rising inflation risks. In recent months, fed officials, including Yellen and Vice President Stanley Fischer, said that the regulator close to the achievement of the goals in this key for calculating macroeconomic indicators and be appropriate to raise rates in the near future.

In February, the situation on the labour market has exceeded expectations of analysts. According to the Ministry of labour, published on 13 March, the unemployment rate in February decreased over the month by 1 percentage point, to 4.7% (as expected by analysts polled by Reuters), and the number of jobs increased by 235 thousand (a figure exceeded expectations). According to revised data for January the number of jobs increased by 238 thousand, and not on 227 thousand, as previously reported. Average hourly wage in the U.S. in February increased over the month by 0.2%.

Core inflation indicators were higher than predicted. The producer price index (Producer Price Index, or PPI), according to the Ministry of trade dated 14 March, in February, increased during the month by 0.3% (economists had forecast an increase of 0.1%) against a growth of 0.6% in January, according to data from the Ministry of Commerce. In annual basis, the growth in February was 2.2% (expected 2%), against 1.6% in January. Basic producer price index in February increased over the month by 0.3% (expected growth of 0.2%) versus 0.4% in January. On an annual basis, the February growth was 1.5% (as expected) vs. 1.2% in January.

Inflation (Consumer Price Index) in February exceeded analysts ‘ expectations. Published on 15 Mar data, over the month prices rose 0.1% (Societe Generale analysts had expected zero growth) for the year — 2.7% (expected growth of 2.6%). In January the annual inflation rate was the highest since March 2013 of 2.5%, the monthly growth reached a record high since February 2013 of 0.6%.

Retail sales in February increased over the month 0.1% as expected. Retail sales excluding autos and parts grew over the month by 0.2%.

Yellen at the press conference following the meeting said that the global economy has improved somewhat since the last meeting of Ministers of Finance and heads of Central banks of the participating countries “big twenty” in the past year. “It is fair to say that the world economy is feeling better and growing a little faster than the last time we had a meeting with colleagues on “to the twenty” — she said. According to reference material of the G20, the last meeting of financiers was held on October 6 in Washington. According to Yellen, the risks now look somewhat more balanced.

At the press conference, the fed chief also commented on the policies of President Donald trump. In her opinion, a serious appreciation of the dollar and protective tariffs promised by his administration, can lead to negative consequences for U.S. exports. “If protective duties are imposed without regard to the exchange rate, they may, according to analysts, seriously to raise the cost of American exports,” she answered to the journalists ‘ question about how protective tariffs can affect the national economy, if the administration trump will keep his promises, and the dollar will start to grow. According to the head of the fed, American currency may begin to rise sharply, in particular due to capital flight into the dollar as the most reliable currency. According to Yellen, in terms of the situation with the dollar there are several scenarios and “serious uncertainty”.

From doves to hawks

Growing inflation risks prompted the fed to accelerate the pace of rate increases for 2017. Yellen at a meeting in December last year announced the intention to increase this year three times, not twice as previously planned.

The building of the Federal reserve

Photo: Yuri Gripas / Reuters

On 14 February she, speaking in Congress, stated that in conditions of moderate growth rates, the approximation of inflation to the target (data for January came after a day) and stabilize the situation on the labour market crisis of 2008-2009, it would be unwise to delay the tightening of monetary policy. His position, she explained that the decision not to raise rates in the near future will lead to the fact that she will have to increase even more rapidly, causing risks to financial markets.

At the beginning of March three representatives of the fed — head of the Federal reserve Bank (FRB) of new York William Dudley, a member of the Board of governors of the Federal reserve Governor Lael Brainard speak and the head of the Federal reserve Bank of San Francisco John Williams said that in the face of rising national and global economies in the case for tightening monetary policy have become more apparent.

Growth prospects

In 2017, will be six meetings: may 2-3, June 13-14, July 25-26, September 19-20, 31 October — 1 November 12-13 December. The rate decision will depend on the reaction of the economy to March increase.

At this moment, the players expect the next rate hike in June or July up to this point, the fed will take a wait and see stance, says analyst group of companies “Finam” Bogdan Zvarich. A similar forecast holds and chief analyst at VTB24 Stanislav Kleschev. “Inflationary pressures, which is observed and can be further strengthened by the fiscal initiatives of the new administration, unable to persuade the regulator to a more drastic tightening of its policy, he believes. — The tone of recent comments from fed officials shows their fears to be behind inflation. If they raise rates today, then the quarter break between the solutions has a high base to survive if will not be significant deviations in macroeconomic indicators. After all, real interest rates remain negative and after today’s increase on 25 b.p.”.

Recently some analysts, including Morgan Stanley and JP Morgan, talk about the possibility of a fourfold increase. Zvarych did not share their position. “The fed must not only raise but also to unload the balance (during the struggle with the financial crisis the regulator by 2017, has accumulated assets of $4.5 trillion; in January the head of the Philadelphia fed Patrick Harker has not excluded that this question will be the key as soon as short-term interest rates will reach 1%. — ) they have something to do with the point of view of monetary policy tightening,” he says. In addition, there is uncertainty about the policies of US President Donald trump, who expects, in particular, to take measures to ease the tax burdens of business and the return of the U.S. dollar, puts Zvarych.

The Bank of Russia is ready to threefold increase in rates; if the fed will stick to plans announced in December, is unlikely to affect the plans of the Central Bank’s easing of monetary policy in 2017, experts believe. “Central Bank it is important to keep a high real return on interest rates. If, following the increase in rates will start to rise the return on the market of US government bonds, it will be a challenge for the Central Bank to lower the key rate,” — said the Director of investments Mr Zubrow “TKB investment partners”.

Mites of VTB24 expects to reduce the key rate of the Central Bank to 8.5% per annum to the end of the year when half the fed rate hike. “A more aggressive fed tightening could be an additional factor that can stretch out the time cycle of easing monetary policy of the Central Bank, but he does not complete it. We expect to continue to reduce the key rate of the Central Bank of the Russian Federation in 2018,” he said.

In 2018, three fed plans rate hike, the statement of the regulator. At the end of the current year the rate will reach 1.4 percent in June and 2.1%, and by the end of 2019 and 3.0% said Yellen at a press conference.