The US Federal Reserve lifted interest rates for the second time in three months last night, but sent the dollar and US Treasury yields tumbling with a cautious outlook on economic growth and future hikes.
The federal funds rate was raised to 0.75 per cent-one per cent. However, the Fed stuck to its forecast of just two more rate increases this year, defying trading floor expectations for a hawkish shift in policy.
Further tightening will only be “gradual,” the Fed insisted, also refusing to upgrade its growth forecasts.
The dollar fell 1.2 per cent against a basket of key currencies and hit a five-week low against the euro. Late last night the dollar was trading around $0.932 cents per euro, more than one cent down on the day.
Sterling briefly moved above $1.23, up from $1.215 on Tuesday.
Stocks rose, while bond yields plummeted. The yield on 10-year US government debt fell to an eight-day low 2.497 per cent.
“If economic progress continues, gradual increases in the federal funds rate would likely be appropriate to achieve and maintain and achieve our objectives,” a dovish Janet Yellen, chair of the Fed, said.
“[This decision] does not represent a reassessment of economic outlook or of the appropriate course for monetary policy.”
The chance of a further interest rate hike in June, which had been expected by many investors, fell below 50 per cent following the Fed’s statement and Yellen’s press conference, according to markets.
Asked about the likely impact of President Donald Trump on future decisions, Yellen said “there is great uncertainty about the timing, the size, the character of policy changes that may be put in place,” adding that the Fed would wait for more information about Trump’s policies.
Kully Samra, UK managing director of Charles Schwab, said: “If White House plans for deregulation, tax cuts and more government spending are realised, then growth and inflation could be stronger than expected and lead to more hikes. On the other hand, potential border taxes, trade tariffs and tighter monetary policy could slow growth and inflation.”
The Fed last raised interest rates at its December meeting from a range of 0.25-0.5 per cent to 0.5-0.75 per cent.
On this side of the pond, the Bank of England’s monetary policy committee will decide today whether to increase rates. Markets are not expecting a change.