Saturday, 22 September, 2018


Fed Raises Interest Rates for Second Time this Year

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Conrad Doyle | 14 June, 2018, 05:07

Powell faces a tricky balancing act as the Fed attempts to bring interest rates toward historical averages.

The central bank also signaled two more hikes are coming in 2018 and four in 2019, a possible sign of concern about accelerating inflation in the US.

The Federal Reserve has raised its benchmark interest rate for the second time this year and signaled that it may step up its pace of rate increases because of solid us economic growth and rising inflation.

In a two-day meeting, the Federal Open Market Committee voted to lift the target range for the federal funds rate by 25 basis points to between 1.75% and 2%. The rate is closely tied to adjustable-rate loans, such as home-equity lines of credit and credit cards.

This was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from nearly zero.

A decade after the recession, the Fed has made progress on its objectives. The jobless rate is already the lowest since 2000.

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.

The nightmares that long haunted both hawks and doves have not come to pass, even as the Fed held interest rates near zero for years and snapped up some $3.5 trillion in bonds in an extraordinary effort to boost the recovery.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

However, higher rates would help savers earn more interest on their deposits. That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed.

"The main takeaway is that the economy is doing very well", Fed Chairman Jerome Powell said at a news conference. "This change is only about improving communications". It would also allow the Fed to be less choreographed and more spontaneous in cutting or raising rates as economic conditions warrant. This was the second hike this year, up from March's increased range of 1.5 to 1.75 percent. In the longer run, it maintained the forecast for 1.8% growth. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year. "Economic activity has been rising at a solid rate".

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. Paychecks aren't soaring, in other words, but at least most Americans are staying ahead of inflation.

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

They expect the core inflation rate to rise to roughly 2% this year.

The tighter policy reflects expectations for stronger growth, lower unemployment and faster inflation than officials had anticipated in March.

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