Economy

Fed raises key rate and sees possible acceleration in hikes

Fed raises key rate and sees possible acceleration in hikes

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%, citing solid economic expansion and job gains.

The Federal Reserve on Wednesday announced that it made a decision to raise interest rates, and it signalled plans to do so more times than expected this year.

The median forecast of members of the Fed's rate-setting Federal Open Market Committee puts the benchmark at 3.1 percent at the end of 2019, up from the previous 2.9 percent, which signals four hikes next year rather than three.

Powell also announced the central bank would start holding news conferences after every policy meeting next year, which means a total of eight in 2019.

While a few items remain on the US central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met.

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

The decision was driven by "indications that inflation is right around the corner", said Jason Reed, an economist and finance professor at the University of Notre Dame's business school.

US growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months.

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The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy. "The Fed is prepared to be quicker about pushing rates higher". Compared with the latest U3 unemployment rate of 3.8% in May, the Fed chairman and his colleagues assume the rate will drop to 3.6% this year.

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".

Fed policy makers now see USA unemployment at 3.6 per cent in the fourth quarter, followed by 3.5 per cent in 2019 and 2020, based on median projections. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth.

It could be that Fed officials only move that long-run rate gradually over time, while they're more actively moving the short-run estimates to keep pace with incoming economic data. Mortgage loans maintained its steady pace of growth at 4.7% YoY.

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.

Fast-forward to April of this year when data showed that US job openings jumped to a record high, far outpacing hiring.

All three central banks (and the Bank of England) aim for inflation of about 2%, but in Japan and the Eurozone prices are rising substantially more slowly.


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