• Fed raised federal funds rate to 2.00% - 2.25%

• Signals strong support for another increase in December

• Fed statement drops language saying that "the stance of monetary policy remains accommodative”.

• Fed raises its economic outlook

The Federal Reserve raised interest rates for the third time this year and signalled it will raise the cost of borrowing again in December. After the end of a two-day meeting, the Fed increased its target for its benchmark lending rate by 25bps to a range of 2.00% - 2.25%. Rates are now at their highest level since shortly after the bankruptcy of Lehman Brothers in the fall of 2008. At the end of their deliberations, senior Fed officials dropped long-standing language saying its stance on interest rates “remains accommodative”. The unexpected removal of the language would appear to give the Fed more flexibility on how rapidly it raises interest rates next year. The bank, for instance, could move less aggressively than it plans if the U.S. economy falters or other problems emerge.

The Fed’s overarching goal is to nudge up short-term interest rates to what it considers a “neutral” level that neither supports nor restricts economic growth. Right now the economy is running hot with GDP expanded at a robust 4.2% pace in 2Q18, core inflation is near the Fed’s 2% target and an ever-tightening labor market is forcing firms to boost pay and benefits. Against that backdrop the Fed is prepared to raise rates again before the end of the year. The Fed’s so-called “dot plot” showed that 12 officials now expect another quarter-point rate hike in December, up from eight officials in the last projections in June. Only four officials now pencil in a pause.

Source: BIMB Securities Research - 27 Sept 2018