The US Federal Reserve raised interest rates last night and said it was keeping the core of its plan to tighten monetary policy intact even as central bank officials said they would likely slow the pace of further rate increases next year.
After weeks of market volatility and calls by President Donald Trump to stop increasing borrowing costs, the Fed lifted rates by a quarter of a percentage point. Chairman Jerome Powell also said the central bank would continue drawing down the size of its balance sheet by $50bn (€44bn) each month.
The rate increase, the fourth of the year, was expected, but Mr Powell’s comments on the balance sheet in a news conference, though a repetition of longstanding Fed policy, prompted a sell-off on equity markets.
The S&P 500 index .SPX was down about 1.6% in late afternoon trading.
By diminishing its bond market holdings each month, the Fed puts further upward pressure on interest rates, something Mr Trump explicitly requested them this week to stop.
“I think the run-off of the balance sheet has been smooth and has served its purpose, and I don’t see us changing that,” Mr Powell told reporters after the Fed raised its federal funds rate to a range of between 2.25% to 2.50%.
The central bank did bow to rising uncertainty about global economic growth, and expectations the US economy will slow next year, with fresh economic forecasts showing officials at the median now see only two more rate hikes next year compared to the three projected in September.
It noted that “some” further gradual rate hikes would be needed, a subtle change that suggested it was preparing to stop raising borrowing costs.
But another message was clear in the policy statement issued after the Fed’s last meeting of the year and Mr Powell’s comments: The US economy continues to perform well and no longer needs the Fed’s support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.
In its statement, the Fed said risks to the economy were “roughly balanced” but that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
The decision to raise borrowing costs again is likely to anger Mr Trump, who has repeatedly attacked the central bank’s tightening this year as damaging to the economy.
The Fed has been raising rates to reduce the boost that monetary policy gives to the economy, which is growing faster than what central bank policymakers view as a sustainable rate.
There are worries, however, that the economy could enter choppy waters next year as the fiscal boost from the Trump administration’s spending and $1.5t trillion tax cut package fades and the global economy slows.
“I think that markets were looking for more in terms of the pause,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.
“It’s not as dovish as expected, but I do believe the Fed will ultimately back off even further as we move into the new year.”
Fresh economic forecasts release yesterday showed policymakers expect two rate hikes next year and one the following year, with the median forecast for the federal funds rate at 3.1% at the end of 2020 and 2021.
That would still leave borrowing costs just above policymakers’ downgraded view of a 2.8% neutral rate that neither brakes nor boosts a healthy economy.