Fed raises key rate and sees possible acceleration in hikes

14 June, 2018, 05:40 | Author: Regina Silva
  • Federal Reserve Chairman Jerome Powell speaks following the Federal Open Market Committee meeting in Washington. Investors are eagerly awaiting the updated economic forecasts the Fed will issue when its meeting

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy.

Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected. Inflation expectations are slightly higher this year compared to March's forecast of 1.9%.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. United States stocks dropped slightly on the news, notes MarketWatch, and bond yields nudged higher.

In the currency market, the dollar was relatively well bid ahead of the Fed's meeting. Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

"The main takeaway is that the economy is doing well", he said.

Rates for savers have tended to lag the Fed's hikes.

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In another slight change of language - something sure to catch the attention of Fed watchers - it said "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the Committee's symmetric two per cent objective over the medium term".

"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".

In its quarterly Summary of Economic Projections, officials projected the Fed's preferred inflation measure will accelerate only slightly, ending this year at 2.1 per cent rather than 1.9 per cent, and holding at that level through 2020. Year over year headline PPI jumped to 3.1% year over year versus 2.6% year over year, with the core rate at 2.4% year over year versus 2.3% year over year.

The rate move was not a surprise in any sense of the word, given that Fed funds futures were pricing in a 100% chance of a 25-bps hike today; as has become the expectation, the Fed changed its policy when it had a new Summary of Economic Projections in hand. Rates for vehicle loans and variable-rate mortgages are also likely to increase. But that exorbitant rate is likely to go up to 15.57% within two billing cycles, CompareCards says, as lenders pass along the higher rates to clients.

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.

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