Fed raises interest rates and predicts faster pace of future increases

Will the Fed Break the Dollar's and S&P 500's Calm

Fed raises interest rates and predicts faster pace of future increases

The Federal Reserve raised USA interest rates again on Wednesday, the seventh increase since 2015 when the central bank resumed raising rates after the last recession.

The Federal Reserve raised its key rate by 25 basis points and signaled two more rate hikes this year.

At a news conference, Powell sought to portray the Fed's actions as evidence mainly that the economy is doing well and not that the central bank is eager to accelerate its rate increases.

While a few items remain on the USA central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met.

Unemployment estimates have been a question mark for some time - the US central bank has lowered the long-run estimate by about a percentage point over the past 5 years - but the stakes are now higher.

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.

The decision was driven by "indications that inflation is right around the corner", said Jason Reed, an economist and finance professor at the University of Notre Dame's business school.

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. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally reaching the Fed's 2 percent target level.

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

The Fed also continued to suggest it would allow inflation to run a little hot, above its 2 percent inflation target before putting on the brakes with additional rate hikes. The Fed has now raised rates seven times since late 2015.

The forecast for real GDP growth for 2018 was revised to 2.8 percent from 2.7 earlier.

The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.

In a technical move, the central bank also made a decision to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.

That index now is at 2 per cent but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed. "Economic activity has been rising at a solid rate". "Vehicle loans growth spiked to 5-year highs with a rise of 7.8% YoY in April".

Higher rates in India can derail economic growth, which still is not on strong footing and can be negative for the equity market.

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