Federal Reserve hikes US interest rates in defiance of Donald Trump

Stock markets have retreated sharply over worries of further US interest rate rises, after the Federal Reserve defied Donald Trump to increase rates for the fourth time this year.

Share (LSE: SHRE.L - news) values fell sharply in the US and Asia - with the FTSE 100 opening 1.5% down in a broad-based sell-off - as investors had hoped for a more "dovish" forecast from the central bank about future rises.

It signalled two more in 2019 at a time when markets fear a significant slowdown in the world economy.

The Fed raised rates again despite pressure from the US president - who has tweeted repeatedly about his opposition to a rise - as it lifted its benchmark rate to a range of 2.25% to 2.5%.

The bank's chairman Jerome Powell - who was picked by Mr Trump for the role at the start of this year - said politics "play no role whatsoever" in the bank's decision making.

The hike will mean higher borrowing costs for many consumers and businesses.

It is now forecasting US economic growth of 2.3% next year, down from an earlier estimate of 2.5%, and also sees the unemployment rate rising slightly more quickly.

On Wall Street, the Dow Jones Industrial Average erased earlier gains to close 352 points, or 1.5%, lower on the day.

The Nasdaq was more than 2% lower while Asia later followed US markets down, with Japan's Nikkei ending Thursday's session 2.8% down to leave values at a 15-month low.

Markets in Germany, France, Italy and Spain were all trading around 1.5% down in early deals though the FTSE's losses eased as the morning continued with the index off by just 0.4% by 11.30 GMT.

Jasper Lawler, head of research at London Capital (LSE: LCG.L - news) , said Mr Powell could be likened to "the Grinch that stole the Santa rally" from investors after a tumultuous three months for markets.

"The recent market chaos and tightening of financial conditions has not fundamentally altered the Fed's outlook.

"Despite the Fed hanging onto its positive outlook, we do know that the Fed will only go forth and hike if data coming out of the US improves," he wrote.

Oil prices also continued their recent decline, with Brent crude dipping below $55 a barrel for the first time since September last year amid continued fears of over-supply and weakening demand.

The rate hike came a day after Mr Trump urged the Fed not to "make yet another mistake", while on Monday he said it was "incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us... the Fed is even considering yet another rate hike".

Interest rates in the US, the world's biggest economy, were slashed to nearly zero during the financial crisis but have gradually been rising since 2015.

Ultra-low rates were used by central banks across the world during the crisis to try to aid economic recovery but policy makers in the US are returning them to a more normal level as they focus on keeping a lid on inflationary pressures.

The Fed said on Wednesday that the US economy has been growing at a strong rate and the jobs market had continued to improve.

However, there are fears that conditions could turn tougher next year as the fiscal boost from Mr Trump's spending and tax cut package fades and the global economy slows.

Alongside the rate rise, Mr Powell also said the central bank would keep reducing its holdings of trillions of dollars worth of government bonds which were purchased as a further element of crisis-era stimulus.

The Fed is currently cutting the holdings at the rate of $50bn a month - a policy that, like its rate rises, has been criticised by the US president.