Fed Raises Rates and Signals Faster Pace in Coming Years

Daniel Fowler
June 13, 2018

The US Federal Reserve has raised its benchmark lending rate, the second increase of the year.

It is the seventh time the bank has raised rates since 2015. Fed officials had been split about whether to raise rates three times this year or four.

The Fed move came after a two-day meeting where its members discussed the robust state of the U.S. economy and the potential impact of a trade war amid rising tension between the USA and its largest trading partners.

Economists and Wall Street strategists are closely following the Fed's policy views.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective.

Wall Street was not happy by the aggressive new stance and all three major indexes turned negative right after the announcement with the Dow down 0.23

Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.

However quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4%, rather than the 2.1% projected in March.

Even so, raising rates too quickly could prevent vulnerable Americans and pockets of the country still struggling from reaping the benefits of a strong economy. Unemployment, now at an 18-year low of 3.8 percent, would drop to 3.6 percent by year's end and to 3.5 percent in 2019 and 2020 - levels not seen in 49 years. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

Powell faces a tricky balancing act as the Fed attempts to bring interest rates toward historical averages.

Rates for conventional mortgages are likely to see more gradual change. Not since 1969 has the jobless rate been lower. Officials have also set in motion a plan to reduce the Fed's bond holdings, as the central bank moves away from accommodative policies employed during and after the 2008 financial crisis.

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