Fed lifts rates amid stronger inflation

WASHINGTON: The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the US central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 per cent to 2 per cent, the Fed dropped its pledge to keep rates low enough to stimulate the economy ‘for some time’ and signalled it would tolerate inflation above its 2 per cent target at least through 2020.

“The economy is doing very well,” Fed chairman Jerome Powell said in a press conference after the rate-setting Federal Open Market Committee released its unanimous policy statement after the end of a two-day meeting.

“Most people who want to find jobs are finding them. Unemployment and inflation are low … The overall outlook for growth remains favourable.”

He added that continued steady rate increases would nurture the expansion, as the Fed approaches a sort of sweet spot with its employment and inflation goals largely met, the economy withstanding higher borrowing costs and no sign of a spike in inflation.

The ongoing economic
expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated.

Policymakers’ fresh economic projections, also issued on Wednesday, indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

They see another three rate increases next year, a pace unchanged from their projections in March.

“The Fed’s path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point. The trajectory of US inflation or the broader US economy would likely need to change materially for the FOMC to deviate from that path,” said Aaron Anderson, senior vice president of research at Fisher Investments.

US Treasury yields rose after the Fed’s decision while US stocks were trading marginally lower and closed down on the day.

The dollar pared some losses but was still trading lower against a basket of currencies.

Powell also announced the central bank would start holding news conferences after every policy meeting next year, which means a total of eight in 2019. The Fed chief currently holds four such events each year.

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

That’s a welcome change from recent years when Fed policymakers fretted about an inflation rate well below target.

The unemployment rate, currently at an 18-year low of 3.8 per cent, is expected to fall to 3.6 per cent this year, compared to the 3.8 per cent that the Fed projected in March.

“The labour market has continued to strengthen … economic activity has been rising at a solid rate,” the Fed said in its statement. “Household spending has picked up while business fixed investment has continued to grow strongly.” — Reuters

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