Federal Reserve raises interest rates

Federal Reserve raises interest rates

The central bank raised its benchmark rate by a quarter point to a range of 1.75% to 2%, as was widely expected.

The Federal Reserve took note of a resilient USA economy Wednesday by raising its benchmark interest rate for the second time this year and signaling that it may step up its pace of rate increases.

Fed officials expect to raise rates two more times this year for a total of four hikes; in March, they expected three rate hikes.

Fed boss Powell sounded optimistic about the economy is his press conference Wednesday.

Second, the lower unemployment over the past couple of months has been accompanied by a drop in the labor force participation rate for 25-54 year olds - the prime working-age group unaffected by the aging of the USA population. Estimates of this long-run level range go all the way from 4.5% to 6%, and may not take account of changes in technology that have improved worker productivity and enabled a lower level of joblessness to be sustained over time without an acceleration in inflation.

Economists said the Fed left little doubt that it's prepared to increase the pace of its credit tightening to guard against high inflation later on.

USA consumer price inflation rose 0.2 percent month on month and 2.8 percent year on year in May 2018. The Fed previously nudged rates up in March. "This is a rare occurrence where the chairperson can help influence and shape the overall dot plot message", Ruskin, the global head of G10 FX strategy, said in a preview.

The already historically low unemployment is projected to fall even further, ending the year at 3.6 per cent before settling at 3.5 per cent in 2019 and 2020.

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It is the seventh time the bank has raised rates since 2015. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March. The further increase announced by the US Federal Reserve on Wednesday is expected to drive the interest rates for mortgage loans even higher.

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

Tighter monetary policy ought not to have a significant impact on the United States economy in the short term, but higher intermediate and long-term interest rates (a effect of rising short-term interest rates) could dampen economic growth over time. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.

The Fed has partially attributed sluggish wage growth to low productivity, or value added per hour on the job, and suggests the situation could stabilize with continued economic growth.

The current economic expansion is the second-longest in USA history, and will set a record if it lasts a bit more than a year longer.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

In a technical move, the central bank also chose 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.

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