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Federal Reserve Raises Rates, Gives Sunny Economic Forecast for 2018

16 December 2017

In a note to clients on Thursday 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 expects the USA job market improvement to slow". It also raised the interest rate on the one-year medium-term lending facility (MLF) by 5 basis points to 3.25%.

The decision by the Fed to hike rates by 25 basis points to a range of 1.25 to 1.5 per cent came as the central bank said it expects faster economic growth and lower unemployment in the U.S. next year.

The PBOC was careful not to refer to its move as a tightening of monetary policy. The so-called core consumer price index, which excludes food and fuel, increased 0.1% in November from the prior month and 1.7% from a year earlier, less than the median projections of economists, a U.S. labor department report showed on Wednesday.

Greg McKenna, chief market strategist at AxiTrader, told AFP the depreciation "suggests (investors) don't believe the Fed's outlook nor its rate projections".

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This makes the third time the Fed has raised rates this year and indicates the central bank has stuck to its "dot plot" of three rises in 2017.

"But at the same time, the slight increase shows it is also trying to keep the interest rate spread with the USA within a reasonable range".

"There might be a central banker or two that might go in that direction".

Cash becomes harder to obtain in the money-markets at the end of the year and through the Chinese Lunar New Year holiday because banks have to meet regulatory requirements, and the demand for money surges over the holiday period. At some point, likely next year, a convergence between market expectations and the FOMC will be needed, in our view. The Chinese central bank raised money-market rates by 20 basis points in total during the first quarter, when the US pushed up its benchmark rate. Wednesday's rate hike was the Fed's first since June.

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According to the Fed's quarterly forecasts, the median estimate for economic growth increased from 2.1 percent to 2.5 percent.

Federal Reserve Chair Janet Yellen turned a skeptical eye on Bitcoin's recent boom, downplaying the cryptocurrency's value and influence at her last press conference as head of the central bank.

"The use of money market rates could serve the objective of battling leverage better than adjustment of benchmark lending and deposit rates", Xie at OCBC said.

What's more, Powell will be joined by several new Fed board members who, like him, are being chosen by President Donald Trump.

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South Korea's vice finance minister said on Thursday the government will prepare for the possible effects of the U.S. Federal Reserve's interest rate increases on markets, although there was little impact from the latest rate hike overnight.

Federal Reserve Raises Rates, Gives Sunny Economic Forecast for 2018