wnol.info July 16 2018

US Federal Reserve raises interest rates

July 16 2018, 04:48 | Alonzo Simpson

Jerome Powell and the Federal Reserve building in Washington D.C

Jerome Powell and the Federal Reserve building in Washington D.C

Following its two-day monetary policy meeting, the Federal Reserve raised interest rates by 25 basis points Wednesday, in line with expectations.

Federal Reserve Chair Jerome "Jay" Powell said job gains are boosting income and confidence, while foreign expansion and tax cuts support additional growth.

While many economists think the current expansion will exceed the 1990's 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.

While an improving economy is good for the job market and worker wages, it's bad for credit-card borrowers because it means higher interest costs.

The change will start in January following the meetings that are scheduled roughly once every six weeks, to give the Fed "more opportunities to explain our actions", Mr Powell told reporters.

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. "Fiscal policy played a role during the crisis, but monetary policy was at the forefront".

"I think we are far enough away now though that the risks are kind of balanced", he said.

The Fed statement also underscored the committee's commitment to growth even though it was notching up the pace of rate hikes this year.

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The decision to raise rates comes as the USA 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.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

Policy makers kept their hiking path at three hikes for 2019 while trimming the 2020 outlook to one increase. Another reason for caution is the White House's threats of more tariffs, including on its closest allies, raising questions over how global trade will affect growth.

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating. At the same time, they project the unemployment rate to fall to 3.6 percent this year, down from earlier projections of 3.8 percent. In the longer run, it maintained the forecast for 1.8% growth.

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.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

"The labour market is getting tighter, and price pressures are picking up", said Greg McBride, chief financial analyst at Bankrate.com. "The labour market is on fire".

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