Fed Raises Interest Rates, Signals 2 More Hikes This Year

14 June 2018, 07:26 | Andres Norman

Federal Reserve raises interest rates

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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.

In its quarterly Summary of Economic Projections, officials projected the Fed's preferred inflation measure will accelerate only slightly, ending this year at 2.1 per cent rather than 1.9 per cent, and holding at that level through 2020. Officials penciled in a total of four rate increases for this year, up from a projection of three increases at their March meeting. "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 main takeaway is that the economy is doing well", he said.

The announcement helped resolved a debate in financial markets over whether the Fed under Jerome Powell, who succeeded Janet Yellen as chairman in February, might see a need to signal a possible acceleration in rate hikes. "This change is only about improving communications".

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point".

"This does not signal anything about the future pace of interest rates hikes", the chairman cautioned.

Economists had predicted the Fed would make this change to overcome the common view that the central bank will not change the benchmark interest rate at a meeting that does not include a press conference, which limits its options.

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That is a welcome step-up from the roughly 2-percent growth averaged throughout the recovery, which was plagued by a series of crises overseas and uncertainties at home, delaying the Fed's tightening plans. That's weaker than the White House's forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts.

In their statement, Fed policymakers noted that the labor market "has continued to strengthen and that economic activity has been rising at a solid rate".

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability".

The increase marks the highest level of interest rates in the United States since 2008. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced".

"In view of realised and expected labour market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 per cent". "I think it's more just, we are just looking at the economy and what does it need and how do we sustain the expansion, keep the labour market strong and try to keep inflation near 2 percent".

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent. More increases are expected this year but the Fed noted "readings on financial and global developments" would factor into its decisions on future increases.



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