US Fed raises interest rate by 0.25pc

Alicia Cross
March 22, 2018

It's a practice instituted by Former Fed chairman Ben Bernanke. But it did boost its 2019 estimate from two hikes to three.

"Job gains have been strong in recent months, and the unemployment rate has stayed low", the FOMC said.

Taken together, the Fed's actions and forecasts suggest a belief that the economy remains sturdy almost nine years after the Great Recession ended. In addition, the already historically low unemployment is seen falling even further, ending next year at a stunning 3.6 percent, according to the quarterly Summary of Economic Projections.

The average rate on a five-year Treasury-indexed adjustable-rate mortgage is now about 3.67 percent, according to Freddie Mac.

Instead of fearing stubbornly low inflation, "officials are now looking to slightly overshoot their 2% inflation target in coming years", the Wall Street Journal reports.

Credit cards with fixed interest rates and annual percentage rates that don't change for a set period of time won't be immediately affected.

The Fed's key benchmark rate now sits at a still relatively low range of 1.5 to 1.75 per cent.

The Fed hasnt hiked rates four times in a year since 2006. "Jerome Powell took over the Fed chair in February, and he is likely to pick up where Janet Yellen left off in terms of language and tone".

In a statement the Fed said its economic outlook had strengthened, but it also noted that household spending and business investment appear to have "moderated" from the end of 2017. Some economists expected the Fed would signal a fourth hike this year.

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While Wednesdays move brings USA interest rates to the highest levels in a decade, they are still far lower than the historic norm of about 5 percent. The decision will be released at 2:00 p.m. It's causing some Fed officials, like the Minneapolis Fed's Neel Kashkari, to wonder whether the economy is actually at full employment.

Naturally, the positive showing also helped to bolster hopes that the Bank of England (BoE) will raise interest rates again in May, shoring up demand for the Pound (GBP) once again.

The policy move leaves central bankers with room to assess whether they will need to raise rates faster to prevent the economy from overheating.

"The positive for the market is that the focus on future rate hikes seems more due to a Fed view of a better economy than necessarily inflation prevention".

Forecasts for all of 2018, though, still predict an acceleration later this year, driven in part by the stimulative effect of the sweeping tax cuts President Donald Trump pushed through Congress in December and a budget agreement last month to raise government spending by $300 billion over two years. Bond yields are little changed after they jumped on Tuesday.

Lael Brainard, a Fed governor who has been less hawkish than many of her colleagues, said in a speech this month that in many ways, "today is the mirror image of the environment we confronted a couple of years ago".

Signs of greater confidence amongst policymakers would give investors further reason to favour Sterling, boosting the odds of a May interest rate hike.

The Fed's measures of inflation were little changed, helping reassure investors that the US central bank may not raise rates more than three times this year.

Other reports by Free-Prsite

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