Federal Reserve Raises Key Interest Rate and Signals More Increases May Come

Thursday, 14 Jun, 2018

After keeping interest rates low for years to boost growth, the central bank is now moving rates back to what economists say is a neutral position.

The federal funds target rate, which is now between 1.75 and 2 percent, is the highest it's been in almost a decade, indicating that the nation's central bank has confidence the economy will continue to expand.

The Federal Reserve is guiding a US economy that is as close to ideal as it could have dreamed a decade ago, when the darkest days of the recession forced it to take big risks to protect workers, banks and economies around the world from further devastation.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000.

"For the first time in many years, the Fed has nearly complete confidence about the outlook", said Michael Gapen, chief US economist at Barclays Capital Inc.in NY. But that exorbitant rate is likely to go up to 15.57% within two billing cycles, CompareCards says, as lenders pass along the higher rates to clients. The labor department reported Tuesday, just as the Fed was meeting, that the consumer price index had risen by 2.8% from a year earlier, the biggest annual gain since February 2012. In fact, the Fed didn't change its median longer-run growth estimate of 1.8 percent.

The so-called " dot plot" released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years.

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"The labour market has continued to strengthen. economic activity has been rising at a solid rate", the Fed said in its statement.

While a few items remain on the US central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met. Officials also said that "indicators of longer-term inflation expectations are little changed".

With employers hiring at a solid pace month after month, unemployment has reached 3.8 percent.

That's a welcome change from recent years when Fed policymakers fretted about an inflation rate well below target.

The Fed said its policy of further gradual rate increases will be "consistent with a sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2% objective".

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".