Published: Thu, March 22, 2018
Markets | By Josh Butler

Fed Raises Key Interest Rate, Lifts 2019 Outlook

Fed Raises Key Interest Rate, Lifts 2019 Outlook

The Federal Reserve voted Wednesday to lift its federal funds rate by 25 basis points to a range of 1.50% to 1.75%.

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.

In its first policy meeting under new Fed chief Jerome Powell, the USA central bank said inflation should move higher amid a stronger economy after years below its 2 percent target.

Checking the updated economic projections, the "dots" continue to point to just two more rate hikes this year, but a speedier pace of tightening in 2019-20 than previously. That was an increase of a quarter of a percentage point. 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 marked the sixth time the Federal Open Market Committee has raised rates since 2015. Financials will benefit from wider interest rate spreads, as will more defensive parts of the stock market.”.

Diane Swonk, chief economist at Grant Thornton, said she expects Powell to be "optimistic in his tone regarding the outlook for the overall economy". But they will respond to any surprises in the accompanying statement, which suggest a deviation from the expected three further rate hikes this year.”. The Fed is widely expected to raise rates, and investors will be watching closely for clues about how many more increases the central bank may make this year and also for the Fed's assessment of how the economy is doing.

The U.S. unemployment rate, now at a 17-year low of 4.1 percent, is expected to keep falling to 3.8 percent at the end of this year and 3.6 percent at the end of 2019, which would be the lowest rate in a half-century. Job gains have been strong in recent months, and the unemployment rate has stayed low. Growth will be 2.4 percent next year, the Fed expects, up from 2.1 percent.

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The economic outlook has strengthened of late, says the policy statement.

"Many of the forces that acted as headwinds to United States growth and weighed on policy in previous years are generating tailwinds now", she said earlier this month in a speech pointing to the recent fiscal stimulus from tax cuts and higher spending. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Federal Reserve Board Chairman Jerome Powell testifies during a Senate banking committee hearing in Washington, D.C., on March 1.

Mr Powell said the Fed is "alert" to the possibility of inflation and expects inflation to rise in coming months, but is not expecting a sharp increase.

In its first policy meeting under new Fed chief Jerome Powell, the U.S. central bank indicated that inflation should finally move higher after years below its two per cent target and that the economy had recently gained momentum.

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