Fed Raises Interest Rates, Signals Faster Hikes on the Way

Fed Raises Interest Rates, Signals Faster Hikes on the Way

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%.

Fed funds futures, which investors use to bet on the path of Fed monetary policy, late Wednesday indicated a 49% likelihood that Fed officials raise rates four times this year up from 46% the day before, according to CME Group data.

Projections released after the Fed's two-day meeting in Washington show policymakers expect the USA economy will grow 2.8% this year, while unemployment falls to 3.6%.

The two-year Treasury yield, which is more responsive to expectations for Fed interest-rate policy, rose to 2.578% from 2.539%.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank's 2% target, hitting 2.1% this year and remaining there through 2020.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent.

Overall, the FOMC saw the median Fed funds rate at 2.4% at the end of 2018, up from 2.1% at the past five meetings.

In another slight change of language - something sure to catch the attention of Fed watchers - it said "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the Committee's symmetric two per cent objective over the medium term".

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To be sure, the Fed is not inclined to hike rates any more than gradually after years of mostly over-optimistic predictions for inflation and economic growth, and disappointing wage gains of around 2.5 percent annually.

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late past year. Not since 1969 has the jobless rate been lower. It kept borrowing costs that low after the financial crisis to encourage businesses and consumers to spend and grow the economy. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year.

Fed officials have begun to debate publicly how close the economy is to overheating. But if it miscalculates and overdoes the credit tightening, it can trigger a recession.

The current economic expansion is the second-longest in USA history, and will set a record if it lasts a bit more than a year longer. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end.

The increase marks the highest level of interest rates in the United States since 2008. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on US imports, which some studies show could cost the USA close to 200,000 jobs.

A global trade war would risk cutting into US economic growth by depressing American export sales and raising inflation by making consumers and businesses pay more for imports.

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