Fed lifts rates amid stronger inflation, drops crisis-era guidance

14 Juin, 2018, 03:15 | Auteur: Auguste Feret
  • Fed lifts rates amid stronger inflation, drops crisis-era guidance

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

And a majority of policy makers said they now expect a total of four interest rate increases this year.

A majority of Fed officials also forecast two more rate rises this year, one more than previously predicted.

Economists said the Fed left little doubt that it's prepared to increase the pace of its credit tightening to guard against high inflation later on.

Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the United States jobs market as "strong" and said economic activity had been rising at "a solid rate".

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish.

It was the Feds seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.

The Fed move came after a two-day meeting where its members discussed the robust state of the USA economy and the potential impact of a trade war amid rising tension between the U.S. and its largest trading partners.

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The latest rate increase was in line with investors' expectations ahead of the release of the policy statement.

But Powell added, "For now, we don't see that in the numbers at all".

The policy statement bypassed discussion about the tensions over the Trump administration's trade policies, including a decision two weeks ago to impose tariffs on steel and aluminium imports from the European Union, Canada and Mexico. That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed. This was the second hike this year, up from March's increased range of 1.5 to 1.75 percent.

With the unemployment rate at 3.8 percent - a level reached only twice before in the past half-century - Fed Chairman Jerome Powell and his colleagues have decided additional rate hikes will very likely be necessary later this year. Unemployment, now at an 18-year low of 3.8 per cent, would drop to 3.6 per cent by year's end and to 3.5 per cent in 2019 and 2020 - levels not seen in 49 years.

Beginning in 2008 in the midst of the financial crisis, the Fed had kept its key rate unchanged at a record low near zero for seven years.

Powell faces a tricky balancing act as the Fed attempts to bring interest rates toward historical averages.

After keeping interest rates low for years to boost growth, the central bank is now moving rates back to what economists say is a neutral position. When the Fed tightens credit, it aims to do so without derailing the economy.

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