Fed Raises Interest Rates for Second Time this Year

Jerome Powell chairman of the US Federal Reserve said there would be four rate hikes in 2018

Image Jerome Powell chairman of the US Federal Reserve said there would be four rate hikes in 2018

Powell was speaking at a press conference after the Fed announced its decision to raise interest rates.

The Fed last raised the benchmark in March, the sixth increase since December 2015, as it tries to keep the economy growing at a sustainable pace without fuelling inflation.

The decision to raise rates comes as the USA unemployment rate hovers at 3.8% - the lowest rate in almost two decades - and inflation, which lagged the Fed's 2% target for years, shows signs of starting to pick up.

The biggest change the Fed made was to signal that it intends to do two more rate hikes this year, instead of just one.

Beginning in 2008 in the midst of the financial crisis, the Fed had kept its key rate unchanged at a record low near zero for seven years. Not since 1969 has the jobless rate been lower. Yet this time, the median forecast for the Federal Funds Rate for end-2018 rose to a total of four rate hikes from three hikes last time.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond".

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In a statement released at the end of a two-day meeting, the Fed suggested that the United States economy is strong and not in need of a boost, according to the New York Times. "This change is only about improving communications". For 2020, the Fed foresees a median of 3.4 percent.

A gradual rise in inflation is coinciding with newfound economic strength.

The Federal Reserve expects the USA gross domestic product to grow by 2.8% in 2018, up from March's forecast of 2.7%. In the longer run, it maintained the forecast for 1.8% growth. Unemployment, now at an 18-year low of 3.8 percent, would drop to 3.6 percent by year's end and to 3.5 percent in 2019 and 2020 - levels not seen in 49 years. In its statement the central bank said that "economic activity has been rising at a solid rate".

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. "On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent".

The committee sees further declines the unemployment.

USA interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. Risks to the economic outlook appear roughly balanced. The most immediately affected will be credit-card interest rates, which are subject to near-instantaneous revision to track the federal funds rate. More increases are expected this year but the Fed noted "readings on financial and worldwide developments" would factor into its decisions on future increases.

"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".

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