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Fed raises key rate and sees possible acceleration in hikes

14 June 2018

Wednesday's decision - the sixth quarter-point increase in 18 months, raising the benchmark federal funds target rate to a range of 1.75 per cent to 2 per cent - was a unanimous 8-0.

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the USA central bank's shift from policies used to battle the 2007-2009 financial crisis and recession.

That implies four total rate increases this year. USA growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months.

The central bank also lifted its growth forecast to 2.8 per cent this year, up a small amount from its projection of 2.7 per cent annual growth in March.

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But Powell added, "For now, we don't see that in the numbers at all".

There's only two ways to limit the hit from higher borrowing costs: Pay off all your credit cards in full each month or spend less on your cards so you won't get penalized as much for purchases bought with money you don't have.

Trump's imposition of tariffs on steel and aluminum imports has enraged USA allies. The Fed expects unemployment to fall to 3.6% this year, and, said Powell, "Most people who want to find jobs are finding them".

Economists had predicted the Fed would make this change to overcome the common view that the central bank will not change the benchmark interest rate at a meeting that does not include a press conference, which limits its options.

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Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4% in 2020 before dropping to 2.9% in the longer run. 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. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year. Prices did not spike in response to the vast monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy.

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

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico.

Since the Fed began holding quarterly news conferences in 2011, it has announced major policy moves only at the quarterly meetings, which have all been followed by a news conference by leader of the Fed. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on USA imports, which some studies show could cost the US close to 200,000 jobs.

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Fed raises key rate and sees possible acceleration in hikes