US Fed raises lending rate, signals slower pace

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So when stocks are already in a bear market, it would take a further 10 percent decline in prices to increase the odds of a quarter-point interest rate cut by 50 percent over the near term, based on our analysis of intraday trading.

The gold price, which sunk to US$1,241.30 per ounce after the rate increase, also rebounded on Thursday, rising as high as US$1,266.20 in the afternoon.

The Fed's move came despite President Donald Trump's attacks in recent weeks on its rate hikes and on Powell personally.

The Fed's move, in spite of warnings from President Trump, seems certain to anger him.

While he highlighted Powell's focus on solid growth prospects, Naroff said the markets may have wanted the Fed to keep rates on hold next year. "Nothing will deter us from doing what we think is the right thing to do".

He said Friday that this week's rate increase was "fully justified and makes sense", but he added the Fed is open to reconsidering its views on rate hikes next year.

The S&P 500 Index dropped 1.5 per cent after policymakers raised rates for the fourth time this year and lowered their forecast for hikes next year to two from three. Bond prices surged, though, sending yields lower. "Powell has a chance to modulate his comments to basically try to correct any market misperception about what the Fed was trying to say".

Fragile markets continue to react to a flood of news, from rate increases to plunging oil prices to an impending U.S. government shutdown. Low-interest rates mean that money can be borrowed cheaply because you don't have to pay back much more than you borrowed.

Central banks generally are supposed to look at the economy as a "whole".

USA junk bonds sold off sharply, with their exchange-traded funds falling 0.9 percent, the biggest decline since March 1.

Yet the USA central bank mostly rebuffed investors' growing worries about recession and raised rates on December 19 for a fourth time this year.

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"Implicit in what's been happening [in stock markets] is a much softer economy than the Fed is forecasting", Carl Tannenbaum, an economist at financial services firm Northern Trust, told the Los Angeles Times.

Answering questions during the press conference, Mr Powell said political considerations play no role in Fed policy making.

"We're going to be letting incoming data inform our thinking about the appropriate path" of future rate increases, he said.

But it was still a greater number of hikes than investors were hoping for given the parlous state of financial markets and a cocktail of anxieties including the US-China trade spat. Since actual changes in monetary policy are relatively rare, we used investor expectations as a stand-in. But it also raises the risk that the Fed will jolt the markets by catching them off guard.

By diminishing its bond market holdings each month, the Fed puts further upward pressure on interest rates, something Trump explicitly requested them this week to stop. The most recent, issued this week, were in a completely different range, from 2.5 percent to 3.5 percent. As Mr Powell has said, the Fed is now feeling its way forward and will act in line with how the economy performs. Over the past year, the 30-year mortgage rate has climbed from 3.95 percent to a peak of almost 5 percent in November - a seven-year high. Consumers, the main driver of the economy, are spending freely.

Inflation is expected to be at 1.9 percent next year, down from 2.0 percent projected in September, before picking up to 2.1 percent in 2020. By 2021, four Fed officials envision reversing course and actually cutting rates to help stimulate the economy.

'The market overreacted to the Fed, I think, said Shane Oliver, head of investment strategy at AMP Capital Investors. Its statement described the economy as strong.

In its updated outlook, the Fed lowered its forecast for growth next year to 2.3 percent from the 2.5 percent it foresaw three months ago.

To be sure, markets have had stronger responses to Fed decisions in the days following a rate increase.

At the same time, Powell tried to make clear the Fed would not blindly pursue its effort to normalize borrowing costs at the risk of inadvertently triggering a recession. From China to Europe, major economies are weakening.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

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