Published: Thu, June 14, 2018
Business | By Tara Barton

Fed lifts rates amid stronger inflation, drops crisis-era guidance

Fed lifts rates amid stronger inflation, drops crisis-era guidance

The Federal Reserve on Wednesday lifted its benchmark rate by a quarter of a percentage point, the second hike this year.

With the unemployment rate at 3.8 percent - a level reached only twice before in the past half-century - Fed Chairman Jerome Powell and his colleagues have decided additional rate hikes will very likely be necessary later this year.

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 raised the interest rate to a maximum of 2.00% as widely expected. The Fed is raising rates gradually to keep the economy in check.

The Fed announced the rate rise at the close of a two-day meeting in Washington.

In its updated forecasts, the Fed envisions stronger growth this year - 2.8 per cent, up from the 2.7 per cent it predicted in March. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally nearing the Fed's target level. "Household spending has picked up while business fixed investment has continued to grow strongly". And their rate increases are addressing the "perceived threat of inflation", not an immediate inflation problem, he said. And that means higher interest rates on plastic.

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The Fed's short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank's battle in recent years to return monetary policy to a normal footing.

"Economic activity has been rising at a "solid" rate, the Fed's statement said, marking an upgrade from "moderate" in the previous statement".

"Job gains have been strong, on average, in recent months, and the unemployment rate has declined", the Fed said.

The Fed's new projection for the pace of rate hikes shows four rate this year and three in 2019 - both unchanged from its previous forecast in March - and one in 2020, down from the two that had been projected previously. In the United Kingdom, the Bank has stopped actively buying financial assets and interest rates are up a little from their lows. The top interest rate now on offer for a savings account is just 2.05 percent, according to Bankrate, with the average rate only 0.06 percent. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

The policy statement bypassed discussion about the tensions over the Trump administration's trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said before the Fed made its announcement that policymakers are "scared of future inflation risk".

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