Fed signals regular rate hikes next year

It pencils in three for 2018 but the sticking point is inflation; greenback weakens, regional markets dip with latest hike

Increases in interest rates will be a regular feature of the United States economy again next year, with strong indications that three hikes have been pencilled in for 2018.

The indications came in the form of the Federal Reserve's "dot plot" of interest rate projections it released after announcing a rate hike yesterday morning (Singapore time).

While that may have surprised a few market watchers, the Fed surprised no one by raising rates by 25 basis points to a range of 1.25 to 1.5 per cent. It said it expects faster economic growth and lower unemployment in the US next year.

It is the third time this year that the Fed has raised rates, and the fifth since it slashed the rate to nearly zero during the financial crisis of 2008 and 2009.

The rate hike sent regional markets down yesterday and the US dollar weakened, but reaction was largely muted. Analysts pored through the Fed's statement for more clues on its thinking that could hint at its future decisions.

In a note to clients yesterday morning, United Overseas Bank economist Alvin Liew wrote: "One highlight... was the change in the language that 'labour market conditions remain strong', versus 'labour market conditions will strengthen somewhat further' in November, and some interpreted this as the Fed expecting the US job market improvement to slow."

This could account for the mixed market reaction after the hike, with the S&P 500 Index ending lower and the Dow Jones Industrial Average closing at a record high.

The greenback weakened against major currencies as well as the Singdollar, as investors were unexcited about the rate hike. Mr Greg McKenna, chief market strategist at AxiTrader, told Agence France-Presse the depreciation suggests investors "don't believe the Fed's outlook nor its rate projections".

The sticking point in the Fed's outlook is inflation, which has continued to fall short of the central bank's 2 per cent target.The Fed's so-called "dot plot" of interest rate projections showed the median forecast was for three rate rises next year.

IG market strategist Pan Jingyi said the weak inflation is fuelling market doubt over the Fed's ability to hike rates that much next year.

Meanwhile, regional markets declined, with the Straits Times Index ending 32.99 points, or 0.95 per cent, lower at 3,435.78. Hong Kong fell 0.19 per cent, Tokyo dropped 0.28 per cent, while Shanghai slipped 0.32 per cent.

CMC Markets analyst Margaret Yang said the regional malaise was likely due not to the Fed but to the People's Bank of China (PBOC).

"The PBOC unexpectedly raised interest rates just a few hours after the Fed did. I think the Hong Kong and China markets in particular are shocked by this action," she said.

"Although the magnitude of the hike was not big, it sent a signal that China would follow the Fed's path of tightening monetary policy."

The global move towards a normalisation of interest rates will have its trickle-down effect here eventually, economists said.

Still, Mizuho Bank senior economist Vishnu Varathan said the Fed's rate hike transmission to the Singapore interbank offered rate (Sibor) may also be partly dampened by Singdollar appreciation expectations, which have already muted the pickup in the swap offered rate.

"Nonetheless, the trend of rising interest rates is unlikely to be reversed in the coming years and, as such, mortgage servicing burden is expected to grow at the margin."

A version of this article appeared in the print edition of The Straits Times on December 15, 2017, with the headline 'Fed signals regular rate hikes next year'. Print Edition | Subscribe