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Federal Reserve raises interest rates despite pressure from Trump

Dominic Rushe in New York

Fed said rates will rise a quarter of a percentage point, to 2.25% to 2.5%, even though president called increases ‘foolish’

Donald Trump and Jerome Powell, chair of the Federal Reserve, at the White House on 2 November 2017. Photograph: Carlos Barría/Reuters

The US Federal Reserve raised interest rates again on Wednesday despite intense, and unprecedented, pressure from Donald Trump to leave rates unchanged.

After a two-day meeting the central bank announced rates would rise a quarter of a percentage point, to a range of 2.25% to 2.5%, the ninth such move since late 2015 and further signaling the Fed’s confidence in the US economy.

The closely watched Fed fund rates is used to benchmark interest rates worldwide, and the Fed’s move is parsed by investors worldwide for signals about the strength of the US economy.

The Dow Jones industrial average dropped 70 points after the announcement to finish the day down 1.49%, while the S&P 500 lost 39.2 points, or 1.54%. US stocks are on course for their biggest December decline since 1931, the depths of the Great Depression.

The selling spread into Asian trade on Thursday, where the Nikkei in Tokyo was down 2.3% and the Hong Kong market was off 1.1%. In China, the Shanghai Composite was down 0.8%.

At a press conference Fed chairman Jerome Powell said the US economy remained strong overall but added that some “cross-currents” had emerged. “Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening,” said Powell, signaling that the pace of rate increases may slow next year.

Powell said that while US growth remained strong, globally economic growth had become more patchy. He said the Fed was carefully watching “event risks” – including Brexit – for their potential impact on the US. But he added US financial institutions are well prepared for any outcome of the UK’s exit from the EU and that the final decision should not have major implications for the US.

“Honestly, it shouldn’t have major implications for the United States, but there’s a lot of uncertainty because it’s not something that’s happened before,” he said.

Trump has waged a public campaign to halt further rate rises, a highly unusual move for a president, calling the increases “crazy” and “foolish” and arguing the Fed’s policy was “the “biggest threat” to the US economy, larger than the administration’s trade dispute with China.

Last month Trump told the Washington Post he was “not even a little bit happy” with his selection of Powell to chair the Fed. On Tuesday, as the Fed was meeting, Trump pressed the Fed to hold off from “making another mistake”.

He pointed to a Wall Street Journal editorial that called for a pause in rate hikes, arguing that US growth may be slowing, Trump’s tariff disputes have dampened trade and sales of homes and cars, both highly impacted by rate rises, have dipped.

In spite of Trump’s criticism the Fed voted again for another small increase in rates. All four of the Fed’s rate increases this year have been approved on a unanimous vote.

White House press secretary Sarah Sanders defended Trump’s criticism of the Fed on Tuesday. “The president is stating his opinion, which he is perfectly within his right to do,” said Sanders. “He has been very clear about what his opinion is while at the same time he understands that the Fed is an independent agency. That doesn’t take away the president’s right to express his opinion on a particular matter.”

Powell defended the Fed’s independence. “Political considerations play no role whatsoever” in the Fed’s decision, Powell said, adding that the independence of the Fed is “essential” if the central bank is to do its job properly. Powell said the Fed based its decisions on the economic data it gathered and “nothing will cause us to deviate from that”.

The Fed is charged with helping to keep unemployment low and controlling inflation. The latest rise comes as the US unemployment rate has dropped to levels unseen since 1969 and inflation has remained low. However, Trump’s trade disputes and the threat of a government shutdown over funding his proposed border wall with Mexico have rattled investors and stock markets have been highly volatile.

Powell said the Fed was watching the recent volatility in the stock markets but downplayed their importance. “We follow markets really carefully but remember, from a macroeconomic standpoint, no one market is the single dominant indicator,” he said.