Federal Reserve Raises Key Interest Rate and Signals More Increases May Come

Marco Green
June 14, 2018

Updating their quarterly forecasts, officials projected the policy rate at 3.1 per cent at the end of 2019, according to their median estimate - compared with 2.9 per cent seen in March - and 3.4 per cent in 2020, unchanged from the prior forecast.

"We've got the rate hike and we've got another two hikes this year being priced in on the dot plan", said Amo Sahota, director at Klarity Fx in San Francisco.

Interest rates are expected to increase to 3.1% next year, up from the previous forecast of 2.9%. The Federal Reserve has raised its benchmark interest rate for the second time this year.

Fed policy makers now see US unemployment at 3.6 per cent in the fourth quarter, followed by 3.5 per cent in 2019 and 2020, based on median projections. The projections show inflation rising 2.1% for the next three years.

Federal Reserve Chairman Jerome Powell signaled growing optimism on the US economy while assuring investors that the central bank would not derail the expansion by aggressively tightening monetary policy.

Fed officials project gross domestic product increasing 2.8 percent this year, up from an earlier projection of 2.7 percent.

Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period. The committee's forecast for the long-run sustainable growth rate of the economy held at 1.8 per cent, suggesting policy makers are skeptical of the effect of tax cuts on the economy's capacity for growth.

"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.

ASX futures are down 0.1 per cent, which indicates the Australian share market is expected to open slightly lower, or with little change. The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 per cent inflation.

In local economics news, the Bureau of Statistics will release its latest jobs and unemployment figures. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced".

"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective".

"In view of realised and expected labour market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 per cent".

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".

Other reports by Click Lancashire

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