Fed raises key rate and foresees 2 more hikes this year

Fed raises key rate and foresees 2 more hikes this year

Newly-installed Fed Chairman Jerome Powell presided over his first meeting, which raised the federal funds rate to 1.5-1.75 percent.

USA stocks are trading higher Wednesday afternoon as investors await news on whether the Fed will raise short-term interest rates at the completion of its two-day meeting. Unemployment is now expected to fall to 3.8 percent this year and 3.6 percent in 2019, which would be the lowest level in decades.

The Fed raised the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.5% to 1.75%.

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The Fed indicated it will make three rate hikes this year.

In its quarterly forecasts, Fed officials project the benchmark interest rate will end this year at 2.1 percent after two more hikes, unchanged from the December forecast, but will rise to 2.9 percent at the close of 2019, signalling three possible hikes. Global bonds and stock markets will follow the US markets in the rally. The Dow was up about 200 points.

But the Fed's new forecast does envision somewhat stronger economic growth compared with its previous estimate: It raises the estimate to 2.7 per cent growth this year, up from 2.5 per cent in the December projection, and 2.4 per cent in 2019, up from 2.1 per cent.

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"It's important that we do something, do what we can as a country to increase our potential growth rate", he said. But officials were divided, with slightly less than half indicating they expect to raise rates at least four times this year. With the unemployment rate at a 17-year low of 4.1 percent and businesses loudly complaining that they can't find enough workers, economic theory suggests that employers should be raising pay more quickly than their current pace of about 2.5 percent a year.

The meeting was the first led by Jerome Powell, and with a more hawkish voting slate, the attention was more on the SEP than the expected rate hike.

The policy move leaves central bankers with room to assess whether they will need to raise rates faster to prevent the economy from overheating. Both steps show confidence that the US economy remains sturdy almost nine years after the Great Recession ended. "We think Fed officials will view the growth and inflation data in recent months as encouraging", analysts at Goldman Sachs wrote in a research note before the meeting, "particularly with tax cuts now implemented and with an additional fiscal boost from federal spending arriving this year". But the new economic forecast, which includes a median projection for the path of future rate hikes, made no change to the December projection for three hikes this year.

"It's not something we observe at the present", Powell said.

A portion of the voting membership of the committee rotates every year among the Fed's regional bank presidents.

Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Fed's 2% objective over the medium term.

The Fed's preferred gauge of inflation stands at 1.5%.

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