Federal Reserve hikes key interest rate for second time in 2018

14 June, 2018, 15:11 | Author: Regina Lloyd
  • Jerome Powell chairman of the U.S. Federal Reserve listens during a House Financial Services Committee hearing in Washington D.C. U.S. on Tuesday Feb. 27 2018. Powell said the central bank can continue gradually raising interest rates as the outloo

The Fed is raising rates gradually to keep the economy in check as inflation creeps higher and the job market grows even tighter.

Fed raised interest rates as expected, signaled two more hikes for the rest of the year.

The Federal Reserve raised interest rates for the second time this year, taking the range of its Federal Funds Rate from 1.75pc to 2pc, up by 0.25 percentage points. The most immediately affected will be credit-card interest rates, which are subject to near-instantaneous revision to track the federal funds rate.

Wednesday's action, which was widely expected, was the second Fed rate hike this year - and the seventh since it began boosting them in 2015.

Beginning in 2008 in the midst of the financial crisis, the Fed had kept its key rate unchanged at a record low near zero for seven years.

Officials lowered their jobless-rate estimates after unemployment fell to 3.8 per cent as of May, matching April 2000 as the lowest reading since 1969.

Policymakers also projected a slightly faster pace of rate increases in the coming months, with 2 additional hikes expected by the end of this year, compared to one previously.

Officials now expect four rate rises this year, not three as the balance of policymakers has shifted since March. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages". The average rate for a 30-year fixed mortgage hit a high of 4.8 percent in the last week of may before dropping slightly.

The statement omitted previous language saying that the main rate would remain "for some time" below longer-run levels.




In a statement released at the end of a two-day meeting, the Fed suggested that the U.S. economy is strong and not in need of a boost, according to the New York Times. "This change is only about improving communications".

"There was some question about the December rate hike and it looks like the Fed is sticking to that plan and I would say this is a very mild negative for risk markets", said Matthew Forester, chief investment officer at Lockwood Advisors Inc in King of Prussia, Pennsylvania.

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

Traders are paying close attention to the spread between the 2-year and 10-year yields.

"Economic activity has been rising at a solid rate", the FOMC said in its statement.

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. So-called core inflation - which excludes volatile items like energy and housing - is now 2.2 percent, around the level the Fed is looking for.

The committee sees further declines the unemployment.

There are rising concerns about trade more generally and the potential risks to the economic outlook.

The Fed's short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank's battle in recent years to return monetary policy to a normal footing. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments.

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