Fed raises rates, Powell talks future plans

Fed raises rates, Powell talks future plans

Fed raises rates, Powell talks future plans

"In view of realized and expected labor 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 percent", read a portion of a Federal Open Market Committee statement released Wednesday afternoon. The Fed expects inflation higher than 2% over the next two years, according to its latest projections.

Interest rates are expected to increase to 3.1% next year, up from the previous forecast of 2.9%. For 2020, the Fed foresees a median rate of 3.4 per cent.

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, U.S., June 13, 2018.

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy.

"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.

The increase in the target range of the benchmark federal funds rate to 1.75 percent to 2 percent had been widely expected, but the slightly steeper pace of rate hikes shown in the dot plot spooked some investors.

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Fed Chair Jerome Powell underscored his own satisfaction with the recovery in his remarks on Wednesday, saying the economy was in "great shape" and even going so far as to hint that he no longer feels constrained by the Janet Yellen-era fear of slipping back to zero interest rates.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent.

The central bank had projected three to four rate hikes this year as the economy continues to pick up steam and inflation nears the 2% target rate thanks to strong labor market conditions. With higher interest rates, this means that real interest rates will push higher. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond".

"The main takeaway is that the economy is doing well", he said.

Rates for savers have tended to lag the Fed's hikes. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years. Prices did not spike in response to the vast monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on USA imports, which some studies show could cost the US close to 200,000 jobs. European Central Bank officials meet on Thursday to discuss for the first time when to end their bond-buying program although they may delay an announcement until July.

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