The Federal Reserve has squeezed in one more interest rate rise before the year end, pushing U.S. stocks into negative territory.
Capping off a busy year with a widely expected move, the central bank lifted the target range for the federal funds rate by a quarter point to 2.25 percent to 2.5 percent, citing a strong economy.
“Job gains have been strong, on average, in recent months, and the unemployment rate has remained low,” it said in a prepared statement accompanying the announcement. “Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year.”
After raising rates nine times since 2015 and four times this year, the rate setters indicated that some more “gradual” increases were on their way next year, although they now expect to push up rates only twice in 2019 instead of three times.
Nevertheless, the prospect of further rises – even if they were less than previous forecast – spooked investors, with the Dow Jones Industrial Average closing down 351.98 points, or 1.49 percent, to 23,323.66, the lowest level so far this year, while the S&P 500 was 1.54 percent lower to 2,506.96.
It will also no doubt make retailers nervous as they’re hoping consumer spending will remain on its strong path next year and while shoppers have taken the increases in stride so far, that could become more difficult as rates creep upward and push borrowing costs higher.
The concern is that maintaining credit-card balances, student loans and many mortgages will become more expensive as rates continue to edge upward, which could lead consumers to start to curb discretionary spending.
As well as raising concerns over consumer spending, the Fed’s policy of hiking rates has garnered negative attention from President Donald Trump, who has broken with tradition to openly criticize the Fed – something presidents usually refrain from doing as the rate-setting committee is meant to be independent.
In the past few months, his rhetoric has gotten stronger, calling the Fed a bigger problem than China and even said he was unhappy with his selection of Powell as chairman.
Not giving up, he took to Twitter again Tuesday: “Don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers”
When asked for his reaction about Trump’s rhetoric, Jerome Powell, the Fed’s chairman, said “nothing will deter us from doing what we think is the right thing to do”.
He added that he’s not worried that Trump’s comments could interfere with the Fed’s ability to communicate with markets about what it is doing.
As for volatility in the U.S. markets, he said while the Fed follows markets really carefully, no one market is the single dominant indicator and what really matters is if changes are sustained overtime.