Fed raises rates; officials boost outlook to four hikes in 2018

Federal Reserve expected to hike rates as Sterling slips

The Federal Reserve announced today that it would raise the target range for the federal funds rate by a quarter of a point.

The US Federal Reserve has raised its benchmark lending rate, the second increase of the year. 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 labour market conditions, and inflation near the Committee's symmetric 2 per cent objective over the medium term.

The decision to raise rates comes as the U.S. unemployment rate hovers at 3.8% - the lowest rate in almost two decades - and inflation, which lagged the Fed's 2% target for years, shows signs of starting to pick up.

"I certainly would've expected wages to react more to the very significant reduction in unemployment that we've had, as I mentioned from 10% to 3.8%", he said.

Fed policymakers projected gross domestic product would grow 2.8 percent this year, slightly higher than previously forecast, and dip to 2.4 percent next year, while inflation is seen hitting 2.1 percent this year and remaining there through 2020.

"We know inflation is going to bounce around", Powell said.

In view of realized and expected labor market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 percent.

The consumer price index was up 2.8 percent from a year ago as of May according to Bureau of Labor Statistics numbers released on Tuesday. And if the Fed were to increase rates excessively without having a proper measure of the slack in the labor market, the result would be a curtailment of aggregate demand, pushing the economy into recession.

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The FOMC's economic growth forecasts were little changed, with 2018 GDP seen rising 2.8 percent rather than 2.7 percent but unchanged at 2.4 percent in 2019 and two percent in 2020.

That index now is at 2 per cent but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed. "This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments".

The 3-month SIBOR has hovered at 1.41 per cent since May.

Even after Wednesday's hike, the real rates in USA are still negative. "The overall outlook for growth remains favourable".

"By just tapping the brakes more quickly, but not harder, the Fed is showing it's willing to let the economy and the expansion run", said Robert Frick, corporate economist with Navy Federal Credit Union.

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.

"This does not signal anything about the future pace of interest rates hikes", the chairman cautioned.

But it's widely expected that - if not at this meeting, then next month - the European Central Bank will set out a timetable for when it ends its quantitative easing program, which may be as early as the end of this year.

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