Federal Reserve bumps up U.S. interest rate, signals two more in 2018

Federal Reserve bumps up U.S. interest rate, signals two more in 2018

Federal Reserve bumps up U.S. interest rate, signals two more in 2018

The Federal Reserve announced it will raise interest rates a quarter percentage point on Wednesday, and signaled that it could raise interest rates at least twice more this year.

Yields earlier swung between gains and losses as investors awaited guidance about whether policy makers see enough pressure on prices to increase their projected pace of interest rate increases, or whether concerns about the ability of the economy to sustain its growth in coming years might lead to a pullback in forecasts of rate increases in coming years, analysts said.

Investors will be listening to Federal Reserve chair Jerome Powell's second press conference as leader of the USA central bank for clues on how the institution is factoring trade conflicts and global tensions into its strategy as it continues on the path toward policy normalization.

"Economic activity has been rising at a "solid" rate, the Fed's statement said, marking an upgrade from "moderate" in the previous statement". The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent. Officials penciled in a total of four rate increases for this year, up from a projection of three increases at their March meeting. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally nearing the Fed's target level.

They expect the core inflation rate to rise to roughly 2% this year. With higher interest rates, this means that real interest rates will push higher.

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USA 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. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly".

Updating their quarterly forecasts, officials projected the policy rate at 3.1 per cent at the end of 2019, according to their median estimate - compared with 2.9 per cent seen in March - and 3.4 per cent in 2020, unchanged from the prior forecast.

Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years. At this point, there's been little evidence that wage or price inflation is accelerating.

The Fed said its policy of further gradual rate increases will be "consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 per cent objective".

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".

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