Published: Thu, June 14, 2018
Markets | By Noel Gibbs

Fed hikes interest rates again, raises outlook for more increases in 2018

Fed hikes interest rates again, raises outlook for more increases in 2018

Following its two-day monetary policy meeting, the Federal Reserve raised interest rates by 25 basis points Wednesday, in line with expectations.

The U.S. central bank is expected to hike its key interest rate another quarter of a percentage point Wednesday.

The unanimous vote brings the federal funds rate to a range of 1.75 to 2 per cent, but the quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4 per cent rather than the 2.1 per cent projected in March. "Most people who want to find jobs are finding them, and unemployment and inflation are low". "Frankly, I do think there is a lot to like about low unemployment". Not since 1969 has the jobless rate been lower. That puts the Fed on track for four rate hikes total in 2018, something the Fed hasn't done since 2006. "The trajectory of United States inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path", said Aaron Anderson, senior vice president of research at Fisher Investments. The S&P 500 Index closed 0.4 percent lower in NY, while benchmark 10-year yields ended a little higher at 2.97 percent.

The dollar index against a basket of six major currencies dipped 0.2 percent to 93.525 after briefly rising to 94.028 on Wednesday. That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed. The Fed chief now holds four such events each year.

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The central bank also lifted its growth forecast to 2.8 per cent this year, up a small amount from its projection of 2.7 per cent annual growth in March. It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020.

Officials now expect four rate rises this year, not three as the balance of policymakers has shifted since March.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year.

In its updated forecasts, the Fed envisions stronger growth this year, with the economy expanding 2.8 percent, up from the 2.7 percent it predicted in March.

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The federal funds rate now sits between 1.75% and 2%.

USA interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 per cent inflation. Rates for auto loans and variable-rate mortgages are also likely to increase. The step was needed, the Fed said, to be sure rates stay within the intended boundaries. The Trump administration's move to impose tariffs on steel and aluminum imports already has affected prices paid by construction firms and other metal users, and some of those costs are likely to spill down to consumers.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said before the Fed made its announcement that policymakers are "scared of future inflation risk".

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