Fed policymakers rally around the ‘price stability flag’ in rate hike

The U.S. Federal Reserve has done what markets overwhelmingly expected (and President Donald Trump vehemently opposed) and raised its policy interest rate to a target range of 3.75 per cent to four per cent — its first hike in three years — as inflation remains stubbornly above the central bank’s two per cent target.

“The plain fact is that inflation is too high and has been for too long,” Fed chair Kevin Warsh said at an afternoon press conference. “This summer’s inflation readings do not tell me that underlying trends have meaningfully improved.”

Here’s what three economists had to say about the Fed’s decision and the outlook for future rate hikes.

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In a note, TD Economics director and senior economist Thomas Feltmate said the Fed’s decision was widely anticipated amid higher oil prices and August’s hotter-than-expected inflation, which came in at 3.4 per cent.

“Holding rates steady risked undermining the Fed’s commitment to returning price stability, potentially pushing longer-term Treasury yields even higher,” he said. “Instead, the rate hike and hawkish shift in the dot plot provided some reassurance to market participants, leading to a modest flattening in the yield curve.”

The question now is how many more rate hikes are on the table. Feltmate said a “one and done” approach would be “inconsequential” for both economic growth and fighting inflation.

“But we would also argue that current Fed futures pricing of nearly three additional hikes over the next year is overstated,” he said. “Delivering on one more quarter-point hike at its next meeting would largely undo last year’s insurance cuts and move the policy stance into a slightly more restrictive setting.”