Date
13 November 2018
Fed Chairman Jerome Powell speaks at a news conference in Washington on Wednesday following a two-day meeting of the central bank’s rate-setting committee. Photo: Reuters
Fed Chairman Jerome Powell speaks at a news conference in Washington on Wednesday following a two-day meeting of the central bank’s rate-setting committee. Photo: Reuters

Fed raises rates, signals two more hikes this year

The US Federal Reserve on Wednesday raised interest rates for the second time this year and signaled two more hikes in 2018 as the world’s largest economy continues to do well amid falling unemployment and improving inflation outlook.  

The central bank lifted its benchmark overnight lending rate a quarter of a percentage point to a range of 1.75 percent to 2 percent, and dropped its pledge to keep rates low enough to stimulate the economy “for some time”, Reuters reports.

Policymakers signaled they will tolerate inflation above the 2 percent target at least through 2020.

“The economy is doing very well,” Fed Chairman Jerome Powell said in a press conference after a two-day meeting of the central bank’s rate-setting committee.

“Most people who want to find jobs are finding them. Unemployment and inflation are low … The overall outlook for growth remains favorable.”

He added that continued steady rate increases would nurture the expansion, with the central bank’s employment and inflation goals largely met.

The ongoing economic expansion coupled with solid job growth has pushed the Fed to raise rates seven times since late 2015, rendering the language of its previous policy statements outdated.

The latest economic projections indicated a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

The Fed’s first hike this year was in March.

Policymakers see another three rate increases next year, a pace unchanged from their projections in March.

The Fed expects US gross domestic product to expand 2.8 percent this year, slightly higher than previously forecast, and dip to 2.4 percent next year, while inflation is seen hitting 2.1 percent this year and remaining there through 2020.

The unemployment rate, currently at an 18-year low of 3.8 percent, is expected to fall to 3.6 percent this year, compared to the 3.8 percent that the Fed projected in March.

“The labor market has continued to strengthen … economic activity has been rising at a solid rate,” the Fed said in a statement.

“Household spending has picked up while business fixed investment has continued to grow strongly.”

The Fed’s short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank’s battle in recent years to return monetary policy to a normal footing, Reuters noted.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as “accommodative,” with gradual rate increases likely warranted as the economy enters a 10th straight year of growth.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”

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RC

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