Fed hikes interest rates again, raises outlook for more increases in 2018

Alicia Cross
June 14, 2018

The number viewing three or fewer hikes as appropriate fell to seven from eight.

The FOMC statement stressed that rising interest rates were unlikely to derail economic growth - which the committee now characterises as "strong" rather than "moderate" - and again made clear the Fed had some tolerance for inflation above its 2 per cent target.

"In view of realised and expected labour market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 per cent". Other changes included referring to "further gradual increases" instead of "adjustments". The new projections reflect policymakers' view that economic activity and inflation have picked up and are likely to grow a little faster than previously forecast. And since the Fed started its post-recession rate increases in late-2015, they've coincided with hikes so that the chair has an opportunity to explain the decision.

The Federal Reserve raised U.S. interest rates again on Wednesday, the seventh increase since 2015 when the central bank resumed raising rates after the last recession. The statement the Fed issued today after its latest policy meeting ended suggested that he does.

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".

"Having twice as many press conferences does not signal anything about the pace or timing of future interest rate changes", Powell said. Rates for auto loans and variable-rate mortgages are also likely to increase.

The new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

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The already historically low unemployment is projected to fall even further, ending the year at 3.6 per cent before settling at 3.5 per cent in 2019 and 2020.

Members are also calling for three more rate hikes in 2019.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 per cent in 2020 before dropping to 2.9 per cent in the longer run. A positive change in employment of 18K is expected.

In its updated forecasts, the Fed envisions stronger growth this year, with the economy expanding 2.8 percent, up from the 2.7 percent it predicted in March. Ahead of the announcement, markets were pricing in a almost 100% chance of a rate hike.

The Fed's preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.

USA central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 per cent" would help anchor long-run inflation expectations around the target.

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy. The committee also cut their forecast for unemployment.

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