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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden and Julia Kollewe

Stocks rise but dollar slides after Federal Reserve raises US interest rates - as it happened

A trader works at his desk on the floor of the New York Stock Exchange today.
A trader works at his desk on the floor of the New York Stock Exchange today. Photograph: Drew Angerer/Getty Images

Closing post

That’s all for us for tonight. Here’s our news story about the Federal Reserve rate rise:

US Federal Reserve raises interest rates to 1% in bid to hold off inflation

The US Federal Reserve has sought to head off rising inflation with a third interest rate rise since the 2008 financial crash and the second in three months, taking the base rate from 0.75% to 1%.

The central bank set aside concerns about the impact of higher interest rates on consumer spending to confirm analyst projections that it is prepared to increase rates several times this year to keep a lid on inflation as it rises above its 2% target level.

The Fed’s chair, Janet Yellen, said a wide range of indicators showed the US economy was in rude health, allowing its interest rate setting committee to push rates back towards historically normal levels. Policymakers voted nine to one to raise rates.

Speaking after the decision, Yellen said she had met Donald Trump’s treasury secretary, Steven Mnuchin, “a couple of times” but had only been “introduced” to the president himself.

“I fully expect to have a strong relationship with secretary Mnuchin,” she said. “We had good discussions about the economy, about regulatory objectives, the work of the FSOC [Financial Stability Oversight Council] global economic developments, and I look forward to continuing to work with him.” She said she had had a very brief meeting with Trump “and appreciated that as well”.....

Here’s the full story:

Goodnight, and thanks for reading and commenting. GW

Caution was the order of the day as the Fed took another step towards normalising monetary policy.

So says our economics editor Larry Elliott, who writes:

The key messages from Janet Yellen on Wednesday were that rates will continue to rise but at a cautious pace. She stressed that the central bank expected the economy to grow at a rate that would warrant gradual increases in interest rates. That will be taken as a hint that there will be two more rises during the course of 2017.

The Fed has now raised interest rates three times in the past 15 months. Clearly, the period of ultra-low borrowing costs is at an end. The so-called normalisation of rates is under way.

But it is also obvious that the Fed sees the new normal as being quite different to the old normal. In the mid-2000s, Alan Greenspan’s Fed raised interest rates 17 times in gradual quarter-point jumps until they topped 5%. This time, the Fed sees rates peaking at a much lower level – about 3% – and as things stand they won’t get there until 2019.

Fed rate hike: What the experts say

Lena Komileva of G+ Economics says the Federal Reserve has achieved a ‘dovish tightening’ of monetary policy with today’s rate rise.

Having test-driven a more hawkish communication strategy in the markets in the run-up to this month’s rate hike, the Fed’s unchanged gradualist stance and Chair Yellen’s measured tone about the Fed’s pursuit of a neutral policy stance have calmed investor nerves.

The Fed’s hand is clearly guided by greater confidence in guiding the economy towards its dual inflation and full employment mandate, rather than a desire to start a bonfire in bond markets.

The Fed has only made modest changes to its forecasts today, points out Chris Weston of IG:

We have seen a slight upgrade to its view on business investment, which seems fair and while the Fed see inflation “moving” to target they stipulated that the committee will carefully monitor actual inflation developments relative to its “symmetric inflation goal”.

One could argue this seems even a touch dovish, as it effectively signals that the Fed feel there are risks of inflation moving above its target of 2%. They are indirectly urging market participants to focus far more heavily on core inflation or PCE, given the volatility and unpredictability of energy and food prices.

Capital Economics say:

As everyone expected following the recent blitz by officials to prepare the markets, the Fed raised the fed funds target by another 25bp today, to between 0.75% and 1.00%, but officials left their interest rate projections largely unchanged. As a result, this hike won’t prompt markets to revise up expectations of how fast monetary policy will be tightened over the next few years.

Manuel Ortiz-Olave, Market Analyst at Monex Europe, is struck by the fact that today’s vote wasn’t unanimous:

“While the Fed hiked interest rates, Kashkari voted against, showing not all FOMC members agree it’s the right time to normalise monetary policy. This contradicts the recent bullish market consensus.

“Markets are reassessing the future path of interest rate hikes, which is putting downward pressure on the dollar. The market had started to price in a total of four hikes this year, assuming the Fed was ready to begin an aggressive path of monetary tightening, but that is clearly no longer the case.

Anna Stupnytska, Global Economist at Fidelity International, believes the Fed may miss its target of three hikes in 2017:

“In all, the Fed looks unlikely to ‘take away the punchbowl’ from global growth any time soon. Our base case is only one more hike this year. This is because we are likely reaching a cyclical peak soon, and the likelihood of a China slowdown weighing on global inflation, markets and growth is fairly high.”

The US dollar has suffered its biggest one-day drop since January.

That underlines that the Federal Reserve was less hawkish than some investors expected today.

.

Wall Street closes higher

DING DING: The closing bell has rung on Wall Street, with the main indices all up after the Fed rate decision.

.

Energy stocks led the rally, while financial stocks dipped a little

.

Shares may be up today, but Goldman Sachs is worried that the rally may be over.

Earlier today the bank’s strategists lowered their three-month outlook for global stocks to neutral, while staying overweight cash and underweight bonds.

More here: Goldman Turns Cautious on Stocks as Fed Threatens to Upset Calm

The US stock market is continuing to climb.

The Dow is now up 127 points, or 0.6%, at 20,966, with less than 20 minutes until the closing bell.

Dollar slides as Fed remains cautious on rate hikes

The US dollar continued to slide against other major currencies as Janet Yellen held her press conference.

Traders are concluding that the Fed is still only planning to tighten monetary policy gradually - given policymakers expect two more hikes this year, and three in 2018.

Yellen’s comments about how the Fed is comfortable about allowing inflation to overshoot its target (see here) are also seen as dovish.

The British pound has jumped by 1.25 cents to $1.228, a two week high.

The dollar is also trading at a two-week low against the Japanese yen, down over 1% today.

And the euro has hit a five week high, gaining around 1 cent to $1.07.

US Federal Reserve Chair Janet Yellen at today’s press conference
US Federal Reserve Chair Janet Yellen at today’s press conference Photograph: Shawn Thew/EPA

Last question:

Q: Some people think it’s too early to raise interest rates, because wage growth has been too low.

I would like to see wages increase, and think there is scope for them to increase further, Yellen replies.

But, the Fed’s goal is to achieve maximum employment and low, stable inflation. That’why it hiked the Fed funds rate to 1% today.

She also points out that slow productivity growth has been holding down wage rises.

Asked about regulatory issues, Yellen replies that the Fed has a “relatively light” regulatory agenda at present.

There’s nothing we need to get out right now, she adds.

Updated

Yellen is asked about the possibility of a border tax.

She says it’s “very uncertain” how the dollar would be affected by such a move.

Q: The Fed’s statement today says that your inflation target is symmetric - so how high would you be happy to see inflation rise?

Two percent inflation is not a ceiling, it’s a target, Yellen replies. There will be times when it will be above that target.

If inflation appears to be persistently over target, though, the Fed would have to take action.

Yellen: The economy is doing well

Q: What message are you trying to send to US consumers with this interest rate hike?

Great question, Yellen replies, before declaring:

The simply message is that the economy is doing well

She adds that the Fed has confidence in the economy, and its resilience to shocks. The labor market is strengthening - although obviously not everyone is feeling the benefits.

Yellen is asked about calls for a new Glass-Steagall Act (to prohibit commercial banks getting involved in risky investment banking).

“I don’t know what a 21st century Glass-Steagall would look like,” Yellen replies wryly.

But she doesn’t think that the repeal of Glass-Steagall (during Bill Clinton’s presidency) was a major factor causing the financial crisis.

Updated

Q: The latest GDP figures weren’t very impressive, unemployment hasn’t changed much, and consumer spending isn’t roaring - so why do you feel forced to raise interest rates today?

Yellen replies that GDP is quite a ‘noisy’ indicator. Other economic data suggests the economy continues to strengthen.

Q: So what if the economy doesn’t strengthen? Might you raise rates less rapidly than you expect?

Policy isn’t preset, Yellen replies, and it depends on the data*. The Fed will act in a way that encourages further job creation while bringing the real interest rate back towards its neutral level.

* - unless it’s ‘noisy’, I guess....

Q: Are you worried about the consequences if Donald Trump’s proposed tax cuts and spending increases aren’t enacted?

Yellen says there is an obvious, notable shift in sentiment - but there’s no sign that this has translated into higher spending. The Fed is watching closely in case this changes.

On the global economy, Yellen says the situation has improved.

But there are still uncertainties, which G20 finance ministers and central bankers will discuss at their meeting this weekend.

Yellen is asked about the recent strong stock market rally.

She says that the higher level of equities has helped to ease financial conditions.

Frances Donald of Manulife Asset Management believes Yellen will be pleased to see the dollar falling.

But John Kicklighter of DailyFX isn’t convinced that the language changes in today’s statement don’t really matter.

Q: What do you think the neutral real rate of borrowing costs is?

Yellen says that lower productivity, and population increases, means that the neutral rate is lower than in the past.

Q: Have you met with new Treasury secretary Steven Mnuchin since he was appointed? And have you met Donald Trump?

Yellen says she has met Mnuchin a couple of times, and fully expects to have a strong relationship with him.

She’s also had a “very brief meeting” with the president, and appreciated that opportunity.

Updated

Q: Has the Federal Reserve considered the implications of Donald Trump’s fiscal stimulus plan?

Yellen says they’ve not discussed it, as there is “great uncertainty” over the character and size of potential policy changes.

Q: Why did you remove the word ‘only’ before the phrase ‘gradual increases in interest rates” in today’s statement?

It’s a relatively small change, Yellen says. Our forecasts for the economy and the federal funds rate are virtually unchanged.

Q: You warned that if the Fed were to waiting too long to raise rates, it could be forced into a “rapid” increase in rates. What would this look like?

Yellen says that she can’t really say what a rapid rate of increases would be. But three rate hikes in a year is certainly ‘gradual’.

Onto questions.

Q: What conditions does the Fed want to see before it starts to normalise its balance sheet? (ie, selling some of the assets bought under its stimulus programme since the financial crisis).

Yellen says the Fed favours using interest rates, rather than balance sheet adjustments, as their primary tool right now.

She points out that the Fed could use its balance sheet if interest rates were cut back down to their lowest possible levels (the zero lower bound).

And the Fed will want to be confident in the strength of the economy before starting to shrink the balance sheet.

The economic outlook is ‘highly uncertain’, Yellen continues, adding that policy is not on a preset course.

Monetary policy is still accommodative, after today’s rate rises, Yellen says.

She warns that if the Fed were to wait too long before normalising policy, it could be forced to raise borrowing costs more rapidly “sometime down the road”, causing disruptions in the financial markets.

And it’s likely that the ‘neutral’ level of interest rates is lower than the historical average.

Yellen sounds confident about the labor market, saying Fed policymakers “expect that job conditions with strengthen somewhat further.”

Yellen says that today’s interest rate hike is in response to the ongoing recovery in the US economy, and improved conditions in the labor market.

Our decision to make another gradual reduction...reflects the economy’s continued progress toward its employment/price stability objectives, the Fed chair explains.

Janet Yellen's press conference begins

Fed chair Janet Yellen is holding a press conference to explain today’s decision.

You can watch it live here:

You might expect a currency to strengthen when its central bank raises interest rates. But not today.

The dollar is now down almost 1 cent against the euro, at $1.068.

And it’s lost more than one cent against the pound, which is trading at $1.226.

Nick Dixon, Investment Director at Aegon UK , says Janet Yellen has delived what Wall Street expected:

“Strong economic and job data from the US has only increased calls on Yellen to hike interest rates, so it is no surprise to see the rise today.

Investors will now keep a close eye on the forward look for indications on when the next UK rate rises are scheduled, and today’s US increase adds momentum to the case for this.

Updated

Fed: inflation target is symmetric

Significantly, the Federal Reserve has also stated that its inflation target is symmetric.

In layman’s terms, that means it is prepared to tolerate prices rising faster than its 2% target. That’s a dovish signal (which explains why the dollar has fallen)

Dow jumps, but dollar falls

Wall Street likes what it sees! The Dow Jones index has now jumped by 86 points to 20,929, a gain of 0.4%.

The S&P 500, and the tech-focused Nasdaq index, are both up.

The dollar, though, is sinking. That’s because the Fed hasn’t taken a hawkish line and predicted more rate hikes in 2017 or 2018.

Why the Fed raised interest rates

Today’s statement shows that the Fed still believes that the US economy continues to recover, and can cope with higher borrowing costs.

It says that ‘fixed investment’ by US firms appears to have firmed; that indicates that companies are confident about growth prospects.

It also expects inflation to stabilise around its 2% target in the medium term - a sign that it doesn’t intent to hike rates aggressively.

The Fed also says that the near-term risks to the US economy are ‘roughly balanced’.

Here’s a key section of the report:

Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace.

Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat.

Here’s the new Fed dot plot, showing where policymakers expect interest rates to be over the next few years.

There are a few minor moves, but the bottom line is that the Fed still expects three rate hikes this year, and in 2018.

The Federal Reserve still expects to raise interest rates three times this year (including today’s move).

The decision to raise US interest rates is not unanimous, though!

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, argued against a rate hike.

He’s been arguing that there isn’t enough pressure on wages to justify a hike.

The other nine policymakers outvoted Kashkari, though, and decided a rate hike was needed.

FEDERAL RESERVE DECISION

Breaking! The Federal Reserve has voted to raise US interest rates at today’s meeting.

The Fed has responded to the latest solid economic data by hiking borrowing costs by a quarter of one percent.

That moves the Federal Funds rate up to 0.75% to 1.0% (up from 0.5% to 0.75%)

It’s the first interest rate rise in 2017 (the last one was in December), and only the third since the financial crisis struck.

This won’t shock Wall Street, as most economists had predicted a hike today.

But everyone is now racing to read the statement, and to prepare for Janet Yellen’s press conference in 30 minutes time.

More to follow!

Not everyone is excited, though....

The excitement is building....

Fed decision: What to watch for

This was the scene on Wall Street a little while ago, as traders got ready for the Fed’s decision on interest rates:

Traders and financial professionals work on the floor of the New York Stock Exchange .
Traders and financial professionals work on the floor of the New York Stock Exchange . Photograph: Drew Angerer/Getty Images

With a rate hike widely expected, the real questions are:

  1. How dovish or hawkish will Fed chair Janet Yellen sound?
  2. Will the Fed change its prediction for three rate rises this year?
  3. Will Yellen comment on Donald Trump?

Kit Juckes of French bank Societe Generale says investors will look closely at the ‘dot plot’ produced by the Fed, showing how policymakers expect borrowing costs to rise.

The Fed is a pussy-cat that would like to change its spots into something more like a leopard’s. In practical terms, that means that this evening’s FOMC announcement (6pm GMT, with a press conference half an hour later) is all about the Fed’s projections rather than whether they raise rates or not.

Anything other than a 25bp rate hike would be a huge surprise to the market

Discounting that possibility on the grounds that the Fed is so (too) obsessed with managing market expectations ahead of policy moves, what we’ll watch are the ‘dots’ showing FOMC’s projections of where Fed Funds might go. Market pricing of Fed Funds through 2017-19 is at the bottom end of what the Fed currently projects.

Our US economists think that the 2017/18 dots probably won’t move but beyond that, an upward adjustment is possible to send a signal to the market that the FOMC is serious about normalising policy.

Updated

While we wait for the Fed rate decision, this piece in the FT (£) entitled Brexit means the end of single market access for London is an interesting read. Christian Noyer, the former chairman of the Bank for International Settlements and former governor of the Banque de France, writes:

Will London’s financial institutions lose access to the single market after the UK leaves the EU? When one looks at the legal framework, underlying logic and, in particular, precedents from the European Economic Area, the answer is yes. “Brexit means Brexit.”

There are three conditions for full access to the EU single market and “passporting rights” for financial institutions. First, implementation of EU regulations under the control of the European Court of Justice; second, payment of a sizeable contribution to the EU budget; and third, the “four freedoms”. A country refusing to meet these conditions cannot be part of the EU single market because it rejects the market’s logic. It’s as simple as that.

Some observers, however, believe they can secure entry through the back door after exiting through the front. It is called “free access on the basis of regulatory equivalence”. It is worth noting that, if this were truly possible, the foundations of the single market would be undermined, a key element of EU cohesion would be destroyed and the entire EEA concept would probably die.

Christian Noyer
Christian Noyer Photograph: Charles Platiau/REUTERS

European stock markets have now closed.

  • The FTSE 100 in London rose 0.15% to 7368.64
  • The Dax in Frankfurt rose 0.18% to 12,009.87
  • The CAC in Paris rose 0.23% to 4,985.48
  • The Ibex in Madrid rose 0.79% to 9,983.20
  • The FTSE MiB in Milan rose 1.2% to 19,774.02

Renaultgate? Shares in the French carmaker fell today after a French newspaper report claimed its vehicles were equipped with software allowing them to cheat in pollution tests.

Libération said it had obtained an investigative document from the economy ministry, which indicated that two models – the Renault Captur and the Clio IV – spewed emissions more than 300% above the legal limit in real-life conditions.

Renault described the article as “unbalanced” but declined to comment further, saying it had no access to the confidential investigation.

As a consequence, Renault cannot confirm the veracity, completeness and reliability of the information published in the said article. Renault will prove its compliance with the regulations and reserves its explanations for the judges in charge of investigating this case.

The company said its vehicles had met regulatory standards and stressed that “they are not equipped with cheating software affecting anti-pollution systems”.

French prosecutors said in January that they would look into possible cheating by Renault, after independent experts found high levels of diesel emissions at several carmakers, including Renault.

Renault’s premises were also raided, in the aftermath of the Volkswagen emissions scandal in September 2015. The German carmaker admitted to installing software in its vehicles to cheat US diesel emissions tests. Renault recalled 15,000 cars last year over excessive levels of harmful gases, but the company insisted there was no evidence of deliberate wrongdoing.

The Renault logo on flags.
The Renault logo on flags. Photograph: Loic Venance/AFP/Getty Images

Updated

In London, gains on the FTSE 100 are led by oil and mining firms, keeping the index close to its recent all-time high. But this could change after the Fed decision.

Chris Beauchamp, chief market analyst at online trading platform IG, said:

Indeed, European and UK equities have been more resilient of late than their US counterparts, with some of this down to weaker domestic currencies. The risk for the likes of the FTSE and the Dax is therefore that a less hawkish Fed tonight could spike a rally for sterling and the euro, causing some of the most recent outperformance to reverse.

Overall today has felt like a market that is in dire need of a catalyst, so traders will be hoping that Janet Yellen provides just that.

On currency markets, the dollar slipped after the disappointing retail sales data – despite expectations of a rate hike from the Fed later today. There are question marks over the rate outlook further out, given the uncertainty surrounding Trump’s fiscal policy. The dollar index drifted 0.2% lower.

The Fed’s “dot plots” – its interest rate projections – currently suggest three rate hikes this year but there is concern that the Fed’s language may sound more dovish than before.

The pound earlier hit its highest level this week, of $1.2258, recovering from an eight-week low yesterday caused by fears of a drawn-out Brexit. Sterling is now trading at $1.2218, up 0.5%.

The euro is also up against the dollar, trading 0.25% higher at $1.0628. Concerns about the outcome of the Dutch parliamentary elections today were offset by market speculation that the European Central Bank may soon unwind its stimulus programme.

Updated

Stock markets up ahead of Fed decision

Markets are calm ahead of the eagerly awaited Fed decision, with European stock markets holding on to their gains.

  • FTSE 100 in London up 0.2%
  • Dax in Frankfurt up 0.2%
  • CAC in Paris up 0.25%
  • Ibex in Madrid up 0.9%
  • FTSE MiB in Milan up 1%

On Wall Street, the Dow Jones is 0.2% ahead while the S&P 500 has gained 0.3% and the Nasdaq is flat.

Brent crude has gained 1.3%, to $51.61 a barrel, after data showed US crude stocks fell last week following nine consecutive increases.

The International Energy Agency said global inventories rose in January for the first time despite the Opec output cuts. But if the oil cartel sticks to its production curbs, the IEA predicted a deficit of 500,000 barrels a day for the first half of this year.

Also, delays in processing tax refunds by the US government weighed on consumers’ ability to spend in February. Compared with February last year, retail sales were up 5.7%.

Updated

US retail sales weaken

Inflation in the US hit a five-year high last month, rising to 2.7%, as we reported earlier.

At the same time, retail sales weakened, as households bought fewer cars and cut back on discretionary spending, according to the latest data published today. Retail sales rose just 0.1% in February, the weakest reading since August, suggesting the economy lost some momentum in the first quarter.

Analysts weren’t concerned, though, noting that January’s number was revised higher to a 0.6% rise from 0.4%.

Paul Ashworth, chief US economist at consultancy Capital Economics, said:

Overall, inflation is trending gradually higher and underlying retail sales are healthy enough. Nothing here to suggest the Fed shouldn’t raise interest rates at the FOMC meeting that concludes later today.

Cashier counting money
Cashier counting money
 Photograph: Alamy

Jane Sydenham, investment director of Rathbones Investment Management, says that because a Fed rate hike at today’s meeting has already been priced in, the impact on markets is likely to be small.

After flag waving for more than a year, it would be surprising if Yellen didn’t take the opportunity to raise rates today, especially in light of all the positive data. Facing such a known unknown, markets have almost certainly priced this in and the impact is likely to be minimal.

What investors need to be more mindful of is that this may be just the first of three possible rate rises this calendar year, but other rises will be dependent on continuing strength in economic data and an inflation rate that remains at a manageable level.

Paul Sirani, chief market analyst at brokerage Xtrade, believes that tonight will mark the beginning of a series of Fed rate hikes, and the Bank of England could soon follow suit.

The way the US economy is moving at the moment, we can see the Fed raising interest rates at least three, if not four, times this year. Although, if Donald Trump gets his way then it will almost certainly be the latter.

Business in the US is arguably strong enough to dust off rates up to 2% this year, but Janet Yellen will be wary of moving too fast with plenty of political uncertainty still circling in Europe.

As soon as the Fed moves today, the BoE may not be too far behind. Raising rates amidst the uncertainty of Brexit is of course risky, but with inflation soaring an April rate hike looks about right.

Updated

Sam Fleming of the FT has written a preview of today’s Fed meeting.

Here’s a flavour:

It would now be a significant shock if the US central bank did not lift the target range for the federal funds rate by another quarter point from the current 0.5 per cent to 0.75 per cent.

The chances of a move were seen by markets at around 95 per cent going into the meeting, according to a CME Group analysis of futures prices. So the issue for investors is judging whether the next move could come as soon as June and whether there is the possibility of four increases this year, rather than the three predicted in December.

Either way, the Fed is still likely to characterise its rate-raising plans as “gradual”.

Wall Street opens higher

Over in New York, shares are rising at the start of trading.

The Dow Jones industrial average, the S&P 500 and the Nasdaq are all showing modest gains, as investors get ready for the Federal Reserve meeting.

US stock market opening prices

Paul Sirani, chief market analyst at Xtrade, says the rise in US inflation (see earlier post) means a rate rise is even more likely today:

“Today’s figures show inflation climbed to a five-year high for the second consecutive month, reinforcing strong expectations of a Fed interest rate hike on Wednesday.

“Under current levels of inflationary pressures, Janet Yellen has little choice but to pencil in a first rate when the Fed convenes later today.

“Despite uncertainty surrounding President Trump’s policies, it remains a question of how many hikes we will see this year, with investors fretting over the prospect of four.”

US inflation hits highest since 2012 ahead of Fed decision

Just in: America’s inflation rate has hit its highest level since March 2012, underlining why US interest rates are likely to rise later today.

The US consumer prices index rose by 2.7% year-on-year in February, up from 2.5% in January. On a monthly basis, prices crept up by 0.1%.

Nothing here to scare the Federal Reserve away from raising interest rates in five hours time, I suspect.

And here’s economics editor Larry Elliott, on the worrying slowdown in wage growth:

Average earnings in the three months to January were 2.3% higher than a year earlier: in the three months to December 2016 they rose at an annual rate of 2.6%.

These figures speak volumes about the modern labour market and in particular how the balance of power has shifted in the past four decades. Even when jobs are relatively plentiful and inflation is picking up, workers are unwilling or unable to press for higher pay.

The reasons for this transformation is obvious: deindustrialisation and the growth of employment in the non-unionised service sector; curbs on the power of trade unions; an increase in labour supply. In addition, the one area where trade union density remains high – the public sector – is subject to a 1% pay cap.

More here:

Here’s Angela Monaghan’s take on this morning’s UK unemployment report:

Britain’s unemployment rate has fallen to its joint lowest level since 1975 but wage growth also slowed in a sign of the fresh squeeze in living standards facing UK households.

The jobless rate fell to 4.7% in the three months to January from 4.8% in the previous three months, matching the rate last seen in 2005. It was last lower in the three months to August 1975, when it was 4.6% according to the Office for National Statistics.

Despite the fall, total pay including bonuses slowed sharply from 2.6% to 2.2%, the lowest since early 2016. Real pay growth – adjusted for inflation – was just 0.7%, the weakest in more than two years.

The employment rate was unchanged at 74.6%, the highest since records began in 1971....

More here:

Some reaction to Philip Hammond’s handbrake turn on the NICs increase:

I wonder if Philip Hammond is now regretting making that joke about his predecessor, Norman Lamont, getting sacked.....

Here’s what he said during last week’s gag-filled Budget speech:

The Treasury has helpfully reminded me that I am not the first Chancellor to announce the “last spring Budget”

Twenty four-years ago Norman Lamont also presented what was billed then as “the last Spring Budget”.

He reported on an economy that was growing faster than any other in the G7, and he committed to continued restraint in public spending.

The then Prime Minister described it as the “right budget, at the right time, from the right Chancellor”.

What they failed to remind me was…ten weeks later, he was sacked!

So wish me luck!

Good luck Philip!

Updated

Government ditches plans to raise national insurance rates for self-employed

Oh my goodness! Philip Hammond, the UK chancellor, has just ditched his plan to raise tax rates on the self-employed.

In a very embarrassing u-turn, Hammond has decided to abandon his proposed changes to Class Four National Insurance Contributions, announced in last week’s budget.

This follows a stream of protests from Conservative MPs, especially as the party had promised NOT to raise national insurance rates in its manifesto for the 2015 election

Here’s the key section from Hammond’s letter announcing the change:

Hammond's letter

Hammond is due to speak to MPs about this change of heart, around 2.30pm.

Our Politics Live blog will be tracking it:

Today’s report also shows that the UK employment total rose by 92,000 in the last three months, to a new record high of 31.854m.

Employment Minister Damian Hinds says it’s a good sign:

“I’m delighted by another set of record-breaking figures showing more people in work than ever before and unemployment falling to its lowest in 12 years.

“Employment is up, wages are up and there are more people working full-time. This is good news for hard-working families across the UK as we continue to build a country that works for everyone.

“But we have more to do, which is why we’re pressing ahead with our welfare reforms to ensure that it always pays to be in work.”

The recovery in Britain’s jobs sector in recent years has not been shared equally across the country.

This chart, from the Resolution Foundation, shows how some parts of the country have enjoyed strong growth creation, while others are lagging.

.

The drop in real wage growth, to just 0.8%, is “terrible news”, warns the Resolution Foundation.

Real wage growth

Laura Gardiner, their senior policy analyst, fears that Britain’s “short-lived pay recovery” could end soon.

Weak pay rises and rising inflation mean that a fresh squeeze is due later this year, and has already begun for some workers, especially in the public sector.

“The incredibly poor outlook for pay has pushed a return to pre-crash earnings back well into the next parliament, making the 2010s the weakest decade for pay growth since the Napoleonic wars.

UK wage growth figures

Updated

Ian Kernohan, Economist at Royal London Asset Management, is also concerned by the weak pay growth.

He believes it will prevent the Bank of England raising interest rates this year.

Regular pay growth was disappointing at just 2.3%, and with inflation rising, a squeeze on real household incomes is a major reason why we expect economic growth to slow this year. We expect the MPC to keep interest rates on hold until 2019 at the earliest.”

A couple more charts from today’s report:

UK jobs report
UK jobs report

UK real wage growth falls again

The drop in average earnings (ex bonuses) to 2.3% per year in November-January means that real wage growth has dropped again.

UK inflation was 1.2% in November, 1.6% in December, and a blistering 1.8% in January. So real wage growth was actually only around 0.8%.

Inflation is likely to have jumped again in February (we find out next week)

John Hawksworth, chief economist at PwC, fears that inflation could overtake wage growth this year:

“UK jobs growth was more robust than expected in the three months to January, rising by over 90,000 compared to the previous three months. The momentum of jobs growth actually looks somewhat stronger now than a few months ago, while the unemployment rate fell to 4.7%, its lowest level since 1975. For the moment, the jobs market remains in fine fettle.

“There was less good news on average earnings growth, which fell back to just 2.2% in the three months to January. With consumer price inflation already up to 1.8% in January and set to rise further over the coming months, real earnings growth could be back in negative territory by the end of 2017. This is likely to dampen consumer spending, which could eventually feed through into slower jobs growth as well.”

Updated

Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC), says the UK labour market seems to be in good shape:

“The UK’s jobs market is going from strength to strength, with the number of people in work continuing to rise and unemployment also falling.

But Thiru also expects unemployment to rise in the months ahead, while wage growth stalls:

“UK labour market conditions may cool over the next few years as the expected slowdown in growth and the rising burden of upfront business costs stifle firms’ hiring intentions. That said, we expect that the UK unemployment rate will reach a peak of 5.3% next year, still some way below the historical average.

“However, average pay growth continues to slow, and it appears increasingly likely that inflation will outstrip earnings growth in the coming months, which will put further pressure on consumer’s spending power.

Self-employment total jumps

The number of self-employed people in the UK is rising faster than the number of employed workers, today’s report shows.

The ONS reports that in the last year:

  • employees increased by 144,000 to 26.83 million (84.2% of all people in work)
  • self-employed people increased by 148,000 to 4.80 million (15.1% of all people in work)

Professor Geraint Johnes, Director of Research at Lancaster University’s Work Foundation, says the rise in ‘gig economy’ jobs (such as delivery drivers) is responsible:

“The latest labour market statistics show a large rise in employment and a fall in unemployment (with the rate down to 4.7%). The big gain has come from full-time self-employment - a rise of some 94000 on the quarter - perpetuating the apparent ascendancy of the gig economy.

Professor Johnes is also concerned that wage growth dropped again: to just 2.2% year on year.

“Over the last quarter of 2016 there was a large rise in employment in construction - some 36000 new jobs in this sector. The fall in unemployment is patchy across regions, with the latest regional data indicating increases in both London and the West Midlands.

“Increases in total pay, however, continue to be moderate, with the three month average now growing at an annual rate of 2.2% (down from 2.6% last month). Specifically in construction, the rate of growth has collapsed, and this may be an early sign that the employment growth in that sector may not last.”

Technically, Britain’s jobless rate is now at its joint lowest for 42 years.

The unemployment rate also fell to 4.7% in 2005. It’s not been lower since the heady days of 1975, the year Queen released Bohemian Rhapsody, and Monty Python and the Holy Grail hit the screens.

UK jobs report

Here’s the key points from today’s UK jobs report (which is online here)

UK JOBLESS RATE HITS LOWEST SINCE 1975

Breaking! Britain’s unemployment rate has fallen to its joint lowest level since 1975, at 4.7% in the three months to January.

That’s down from 4.8% a month ago, according to today’s report from The Office for National Statistics.

It suggests that Britain’s labour market hasn’t been hit badly by the Brexit vote.

But.... wage growth has slowed sharply.

Average earnings, excluding bonuses, only rose by 2.3% year-on-year - down from 2.6% a month ago. That’s even worse than expected, and means that real wage growth has taken another hit.

Including bonuses, average earnings only rose by 2.2% - the weakest rise since April 2016.

More details and reaction to follow!

Updated

Here’s a reminder of how real pay growth (wages minus inflation) has slowed in the last few months:

People filling out ballot papers in The Hague, Netherlands, this morning
People filling out ballot papers in The Hague, Netherlands, this morning Photograph: Peter Dejong/AP

Jordan Hiscott, chief trader at ayondo markets, believes European investors will be crossing their fingers and hoping that the liberal VVD party led by Mark Rutte wins the most seats in today’s Dutch election.

Hiscott says:

“Tomorrow’s Dutch elections could be yet another watershed moment for Europe, leading to further political fragmentation. With a country known for its liberal traditions, it’s been surprising that Geert Wilders and his PVV party have managed to assert themselves so much, taking the lead at some point in the last few weeks.

“Most recently though the VVD - the People’s Party for Freedom & Democracy - has re-taken the lead and investors looking for stability in the financial markets will welcome this. The possibility of the PVV coming to power, with its anti-EU stance, could have had a dramatically effect on the EUR FX and Dutch equities markets, both largely negative.

But as I flagged up earlier, the Dutch voting system - and its fragmented politics - means a coalition government is all-but certain. And with all the other main parties vowing not to work with Wilders, the blonde populist could be thwarted.

Duncan Robinson of the FT has done a good preview:

European stock markets are up across the board this morning.

The FTSE 100 has gained 0.2% to 7,373 points - less than 20 points shy of its all-time high.

European stock markets

That suggests investors aren’t too anxious about the UK jobs report, or the US rate decision.

Connor Campbell of SpreadEx suspects traders will be watching the Dutch election closely:

There isn’t a lot for the region to do today, so any political news out of the Netherlands might be its main driver of movement as Wednesday progresses.

Analyst Jens Bastian points out that the Netherland’s political drama has implications for the rest of Europe. It could slow down the process of handing more bailout money to Greece:

(not that Greece and her creditors have reached an agreement on its bailout programme)

Updated

The Bank of England in London.

The pound is having a good morning, jumping almost one cent against the US dollar to $1.223.

Some traders are attributing the rise to a report in The Times today, which argues that the Bank of England should consider raising interest rates soon.

The Times runs its own ‘shadow monetary policy committee’, which gives its own views on what the BoE ought to do. And three of its members believe rates need to rise now, back to 0.5%, to address the jump in inflation. Another three reckon rates should rise in April.

Charles Goodhart, a former Bank ratesetter, argues that the Bank should send a signal when it announces this month’s decision, tomorrow:

“They should lay the ground in the accompanying minutes for a possible increase in interest rates at their next meeting.”

There’s a chance that Britain’s jobless rate could hit a new 11-year low of 4.7% today, down from last month’s 4.8%.

That’s according to RBC Capital Markets, who also predict that wage growth will slow.

Last month’s strong report emphatically removed the skew of risks on the unemployment rate rising from 4.8% to 4.9%. Indeed, if anything, the skew of risks on this occasion is that it could actually drop to 4.7% but our central expectation is that unemployment holds at 4.8% for a fifth consecutive month.

The 3m/3m employment level looks set to post a healthy gain too as the recently softness provides a relatively easy comparator for the latest data. The 37k 3m/3m gain last time should well at least be matched on this occasion.

For average earnings we look for growth to ease to 2.4% 3m/y for both the including and excluding bonus measures from 2.6% 3m/y last time. This would be consistent with the message from the Bank of England Agents’ recent survey on pay settlements which pointed towards growth slowing from 2.7% on average in 2016 to 2.2% for 2017

UK cuts stake in Lloyds below 3%

More than eight years after bailing Lloyds Banking Group out, the British government has taken another step towards the exit door.

The UK has sold another slice of Lloyds shares, taking its stake below the 3% level.

According to the Treasury, this means taxpayers have recovered over £19.5bn of the £20.3bn which they put into Lloyds, once share sales and dividends received are accounted for.

Economic Secretary to the Treasury, Simon Kirby, says:

“Lloyds’ recent annual results show that we are in a good position to reduce our shareholding further and expect to recover all of the money taxpayers injected into the bank during the financial crisis.”

The agenda: UK unemployment and US rate hike (probably)

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

Central bankers like to avoid surprising the markets. So with everyone expecting a US interest rate rise tonight, there’s no reason for the Federal Reserve to worry about announcing its first hike of 2017.

But it’s not quite a simple as that. Investors across the globe want to know how rapidly the Fed will act this year - is it still expecting three rate hikes this year? Might we only see two, or should traders brace for as many as four?

That means we could see market volatility when the Fed releases its statement, and when Janet Yellen faces the press.

We have to wait a few hours for this excitement, though:

  • 2pm EDT/6pm GMT: Fed interest rate decision
  • 2.30pm EDT/6.30pm GMT: Press conference with Fed chair Janet Yellen

But in the meantime, we’re also getting a new healthcheck on Britain’s jobs market at 9.30am.

Economists expect that the UK unemployment rate will remain at just 4.8% in the thee months to January, its lowest since the financial crisis.

But the wages figures could show a slight slowdown, with average earnings (excluding bonuses) tipped to rise by 2.5% per year, down from 2.6% last month. That would be a worry, given inflation is picking up.

Also coming up:

It’s election day in the Netherlands. Can far-right leader Geert Wilders notch up another win for the populists and beat mainstream rivals, such as PM Mark Rutte’s VVD?

Results are expected in the early hours of Thursday. No party is likely to win a majority meaning it could take weeks for a coalition to be agreed.

European stock markets are expected to rise modestly in early trading.

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