Fed Raises Interest Rates, Signals 2 More Hikes This Year

Daniel Fowler
June 14, 2018

U.S. companies are hiring at a rapid pace and consumer and business spending remains healthy, the Fed noted, and core inflation is finally expected to hit the central bank's target of 2 per cent this year. Officials penciled in a total of four rate increases for this year, up from a projection of three increases at their March meeting.

They see another three rate increases next year, a pace unchanged from their previous forecast.

The widely-anticipated decision will lift the target for the central bank's benchmark rate to 1.75%-2%, the highest level since 2008. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly". U.S. stocks dropped slightly on the news, notes MarketWatch, and bond yields nudged higher.

Federal Reserve Chairman Jerome Powell announced Wednesday that as from January 2019, he will hold press conferences after every policy meeting. Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

"The economy is in great shape", Powell said.

The Fed watches price measures closely to determine how fast to raise interest rates but has signalled that the 2 per cent target is not a ceiling, and that it would be comfortable with inflation rising slightly above that level for a time.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

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Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4% in 2020 before dropping to 2.9% in the longer run.

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating.

Treasury yields rose following the rate announcement.

The Fed last raised the benchmark in March, the sixth increase since December 2015, as it tries to keep the economy growing at a sustainable pace without fuelling inflation.

This will raise borrowing costs for credit cards, auto financing, mortgages, and other loans, but help savers earn more interest on their deposits.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond".

Trump has slapped tariffs on steel and aluminum imports, has threatened additional tariffs on Chinese imports and has directed his administration to consider further duties on imported cars.

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