Federal Reserve raises key interest rate, but dials back expectations

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Federal Reserve Board of Governors in Washington, D.C. United States Leonid Andronov © /123RF stock Photos

Yesterday, the Federal Reserve announced it will raise the target range for the federal funds rate by a quarter point and dialed back its expected rate hikes for next year from three to two.

“Over the past year the economy has been growing at a strong pace, the unemployment rate has been near record lows, and inflation has been low and stable,” Jerome Powell, chair of the Federal Reserve said at a press conference. He tempered this, however, noting signs that the economy is softening compared to expectations a few months ago.

 “Powell has emphasized many times that the Fed will be data dependent and today’s adjustments help confirm that,” said Dec Mullarkey, managing director, investment strategy at Sun Life Investment Management in a statement. “These moves also demonstrate that Powell is responsive to evolving financial conditions but doesn’t want to be intimidated by being overly accommodative. Two expected rate increases next year also underscore that monetary policy is not on a prescribed path, yet implies confidence in a continued expansion.”

Looking to Canada, Mullarkey said he expects the Bank of Canada to increase rates two times next year.

“Governor Poloz has generally been data dependent when adjusting rates. Looking into 2019 the first quarter is expected to be weak as domestic oil production will be down while Alberta supply cuts look to stabilize prices. Therefore, the next rate increase is likely in Q2 with another move towards the end of the year,” Mullarkey said in an email to Canadian Investment Review.

“That would bring rates close to 2.25 per cent, which is in the range of the Bank of Canada’s neutral target. So absent any growth overshoot, the Bank of Canada would hold at that level leading into 2020.”

Mullarkey pointed to oil price volatility as a risk to the Canadian economy. “Any material weakness would force the Bank of Canada to tread lightly on any rate tightening,” he said.

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