Economy

Fed reveals interest rate rise

Fed reveals interest rate rise

The Fed forecasts the unemployment rate will be 3.8 percent in 2018 and will decrease to 3.6 percent in 2019 and 2020.

Stocks greeted the Fed's interest-rate increase with volatile trading Wednesday, as the central bank delivered the expected hike but Chairman Jerome Powell gave the market some angst.

The Fed raised its key rate by 25 basis points to a range of 1.50 percent to 1.75 percent on Wednesday and flagged at least two more increases for the year, short of the three that some economists had been predicting. The Fed is "alert" to the risk of higher inflation, but does not anticipate a rapid increase.

If the Fed keeps raising its long-run target for its benchmark interest rate, it would nearly certainly mean the central bank plans to raise rates more aggressively.

The Fed hasn't hiked rates four times in a year since 2006.

"We expect the prospect of a trade war between the USA and other economies to put a floor under gold prices in the short term, but ultimately we think that Fed tightening will prove too strong a headwind", Capital Economics analyst Simona Gambarini told the Reuters Global Metals Forum.

"There is no sense in the data that we are on the cusp of an acceleration in inflation", he said. But Janet Yellen, the former Fed chairman, is not sitting in the big seat anymore. Therefore, if you are an investor in long-term bond fund, you can think of exiting the fund and entering short-term bond fund.

In its first policy meeting under new Fed chief Jerome Powell, the USA central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.

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USA stocks rose after the policy statement before paring gains to close lower.

In its latest forecast, the Fed predicted the USA would grow 2.7% this year and 2.4% next year - well above the 1.8% pace that the central bank views as consistent with stable inflation. The Fed asserted that part of the deviation from 2 percent reflects unusual price declines that occurred almost a year ago. They now expect the unemployment rate to fall to 3.8 percent this year and 3.6 percent in 2019, a low level by historical standards.

Officials' growing optimism tracks with the expectations of many Wall Street analysts.

The improved outlook is aided by firming economic growth in rest of the world, simulative fiscal policy and overall accommodative financial conditions.

The data added to optimism about oil prices after a committee working for the Russia-OPEC group that has capped output on Tuesday said global supplies would balance with demand by the end of September, sooner than previous forecasts. "It could change up". The federal funds rate, which the Fed determines directly, sets the rate at which banks lend money to one another.

The Fed's preferred gauge of inflation stands at 1.5%. Even some members who have fretted more about growth than inflation appear to be shifting their calculus.

"In the earlier period, strong head winds sapped the momentum of the recovery and weighed down the path of policy", she added. The fed funds rate, for example, topped out at 5.25% at the height of the last economic expansion from 2001 to 2007.

Speaking to Congress last month, Powell said his "personal outlook" on the economy had strengthened since December, when the Fed's policymakers collectively forecast three rate hikes for 2018, the same as in 2017. In January, officials described economic activity and job growth as "solid". By definition, slower growth will mean fewer new jobs and diminished wage growth. Markets have been rattled in recent weeks by Trump's tariff plans and embrace of a potential trade war.


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