Federal Reserve raises interest rates

13 June, 2018, 21:50 | Author: Eric Barnett
  • Federal Reserve raises interest rates

However, in order for the Dollar to draw a bid Wednesday the Fed would need to signal that over the coming months they intend to step up the pace at which they raise USA interest rates.

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.

The dot-plot shows where each voting member of the Fed expects the Fed's base lending rate - also known as Fed Funds rate - will be at various points in the future. With higher interest rates, this means that real interest rates will push higher.

The Fed offered an improved forecast for unemployment this year, lowering its forecast to 3.6%. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.

"Economic activity has been rising at a solid rate", the FOMC said in its statement.

After two rate hikes in 2018, investors are focusing on the Fed's updated projections for increases during its remaining meetings for the year.

They see another three rate increases next year, a pace unchanged from their previous forecast.

Fed policy makers now see USA unemployment at 3.6 percent in the fourth quarter, followed by 3.5 percent in 2019 and 2020, based on median projections.

Reichelt says that in the absence of change in the dot-plot, or a hawkish shift in Fed language, then currency markets will probably stick to their current view that USA interest rates may plateau as soon as next 2019, as the Federal Reserve takes the Fed Funds rate up to the so called neutral rate. Inflation by the Fed's preferred gauge would hit its target of 2 percent this year and edge up to 2.1 percent over the next two years.

The median estimate for economic growth this year rose to 2.8 percent from 2.7 percent in March, with projections unchanged for 2.4 percent in 2019 and 2 percent in 2020.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 percent. In addition, inflation rose to 2.8% during the recent month as the sharp rise in oil prices this year got to work on the consumer price index. Not since 1969 has the jobless rate been lower. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year. It would allow the Fed to be less choreographed and more flexible in cutting or raising rates as economic conditions warrant. When the Fed tightens credit, it aims to do so without derailing the economy.

The economic expansion has survived for nine years and is now the second-longest in history.

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point". This is partly why a rate hike is expected; the Fed usually only hikes when there are pressers so the chair can talk about the decision.

U.S. Treasury yields rose after the release of the statement while U.S. stocks were trading marginally lower. All those countries have vowed to retaliate against any USA tariffs with their own penalties against US goods.

The Fed's meeting this week is to be followed by policy meetings of two other major central banks - the European Central Bank on Thursday and the Bank of Japan on Friday. Officials have also set in motion a plan to reduce the Fed's bond holdings, as the central bank moves away from accommodative policies employed during and after the 2008 financial crisis.



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