Thursday, 21 June, 2018

Federal Reserve bumps up USA interest rate, signals two more in 2018

USA-FED Federal Reserve expected to hike rates as Sterling slips
Jean Garcia | 14 June, 2018, 03:14

The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged from the previous forecast.

"For the first time in many years, the Fed has nearly complete confidence about the outlook", said Michael Gapen, chief USA economist at Barclays Capital Inc.in NY.

After nine years of steady if uneven recovery, the United States is now growing at a pace topping 4 percent, unemployment is as low as it has been this century, and inflation has safely edged up toward an official target.

While many economists think the current expansion will exceed the 1990s streak, some worry about what might occur once the impact of the tax cuts begin to fade and the Fed's gradual rate hikes begin to curb growth.

What took investors by surprise was the Fed's projection that it would increase rates twice in the next few months, which was faster than the market had expected.

The median average of the central bank's updated forecasts - also referred to as the "dot plots" - called for interest rates to end the year around at 2.4%, up from March's projection of 2.1%; The forecasts suggest the Fed will raise interest rates two more times this year. The updated dot plot, which reflects voting FOMC members' expectations, showed two more rate hikes this year for a total of four; in March, officials saw three.

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- Fed funds price in an 81% chance of a 25-bps rate hike in September, and odds for December increased from 51% to 57% as Fed Chair Powell's press conference got under way. In the longer run, it maintained the forecast for 1.8% growth.

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly", the Fed wrote in its statement on Wednesday announcing the interest rate hike. Inflation for the next two years is expected to remain at 2.1%, unchanged from the previous forecast.

The committee sees further declines the unemployment.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation.

While a few items remain on the USA central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met. "The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric 2 per cent objective over the medium term", according to its statement following a meeting in Washington. 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. Risks to the economic outlook appear roughly balanced. Estimates of the long-run sustainable unemployment rate were unchanged at 4.5 per cent.

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".

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