YELLEN’S SWAN SONG – THIRD RATE HIKE IN 2017

By Ruma Dubey

It was Janet Yellen’s last press conference as Federal Reserve Chair and there was no doubt that she would do what the entire world expected her to do – hike rates. This was her third rate hike in 2017 and fifth since she took term.

There was no nail-biting suspense as such because the Fed had already indicated that there would be 0.25% rate hike and that’s exactly what we got. The federal funds rate, which is  what banks charge each other for loans has now gone up from 1 to 1.25% to 1.25 to 1.50%.

This should be taken as good news because a rate hike conveys that the American economy is appearing to be healthy. Unemployment is at 17-year low at 4.1% but inflation still lags the Fed’s target – it was a tad above Fed’s target of 2% in Feb but was just at 1.6% in October. And there are three more rate hikes in 2018 and two in 2019; that’s what the “Dots” say.

A quick look at the highlights:

• Raise the target range for the federal funds rate to 1-1/4 to 1?1/2 percent. 
• Labor market has continued to strengthen and that economic activity has been rising at a solid rate. 
• with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.
• Inflation on a 12?month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee's 2 percent objective over the medium term.
• Median estimate for annual gross domestic product growth jumped, to a rate of 2.5% in 2018 from 2.1% when they last met in September. Their growth estimate for 2017 also rose, to 2.5% from 2.4%.
• The stance of monetary policy remains accommodative.
• The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate
• Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

There is no doubt; Yellen should receive a standing ovation for her remarkable tenure. She seamlessly navigated America through a very turbulent financial crisis to an exit from that crisis, without causing any upheavals. In an ideal world, she should have been reappointed as has always been the case but currently America is anything but ideal.

And impact of this Fed decision on Indian markets? It might not be much; almost just a blip and life will move on; it could actually be a case of “getting this out of the way too!”  Indian stocks will have more of a news based movement. There was news on our current account deficit – it narrowed more than estimated last quarter. RBI stated that the deficit was at $7.2 billion in July-September, or 1.2% of gross domestic product. And there is proof that the rally we have been seeing on the markets is by domestic funds and not FIIs, who have been sellers. Net portfolio investments recorded an inflow of $2.1 billion in current Q2, lower than $6.1 billion last year and $12.5 billion in Q1 as foreigners sold Indian stocks. Yet our markets hit new highs. Now isn’t that a good reason enough to celebrate?