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Federal Reserve raises interest rates

13 June 2018

(Kitco News) - Gold prices are holding steady just below the psychological barrier of $1,300 an ounce after the Federal Reserve suggested that it will hike interest rates more aggressively this year and the next as the USA economy continues to grow.

As expected, policymakers at the central bank hiked the benchmark federal funds rate by a quarter percentage point.

It was the Fed's seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.

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Fed officials expect to raise interest rates at least once more in 2018 and had been split on a possible fourth hike in their last meeting. It's the second rate hike under Powell, a Republican appointed to lead the Fed by President TrumpDonald John TrumpWhat you need to know about Tuesday's elections Danny Tarkanian wins Nevada GOP congressional primary Laxalt, Sisolak to face off in Nevada governor's race MORE. The central bank is aiming to keep record low unemployment and a glut of federal spending from pushing inflation beyond the Fed's 2 percent target. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

Negative for gold though is that the central bank also forecasts tame inflation pressures throughout year. The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

Along with rising interest rate expectations.

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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.

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. Inflation expectations are slightly higher this year compared to March's forecast of 1.9%.

The Federal Reserve expects the USA gross domestic product to grow by 2.8% in 2018, up from March's forecast of 2.7%. US payrolls expanded by more than 1 million workers in the first five months of 2018, reaching the milestone faster than in the previous two years. Economic activity is projected to expand 2.4% in 2019, unchanged from the previous forecast; finally, the economy is expected to grow 2.0% in 2020, unchanged from the previous forecast.

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Federal Reserve raises interest rates