Published: Thu, June 14, 2018
Finance | By Claude Patterson

Fed Raises Interest Rates, Signals 2 More Hikes This Year

Fed Raises Interest Rates, Signals 2 More Hikes This Year

WASHINGTON — The Federal Reserve has raised its benchmark interest rate for the second time this year and signaled that it may step up its pace of rate increases because of solid economic growth and rising 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 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 on Wednesday raised interest rates 0.25 points as the bank aims to prevent a tight labor market from driving inflation to unsustainable levels. The Fed is raising rates gradually to keep the economy in check.

Economists said the Fed left little doubt that it's prepared to increase the pace of its credit tightening.

Projections released after the Fed's two-day meeting in Washington show policymakers expect the United States economy will grow 2.8% this year, while unemployment falls to 3.6%.

The Fed now envisions stronger growth this year - 2.8 percent, up from the 2.7 percent it predicted in March. The Fed targets core inflation and it is finally on the rise. "Household spending has picked up while business fixed investment has continued to grow strongly".

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

Consumers can expect interest rates to rise for all types of debt.

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. The statement the Fed issued Wednesday after its latest policy meeting ended suggested that he does.

"Economic activity has been rising at a "solid" rate, the Fed's statement said, marking an upgrade from "moderate" in the previous statement". The Fed's new forecast showed inflation inching up only slightly over the next 2 1/2 years.

The Fed offered an improved forecast for unemployment this year, lowering its forecast to 3.6%.

Fed officials and many economists worry that the low jobless rate could force employers to hike wages faster, as companies compete for workers.

In a technical move, the central bank also chose to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.

Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation, but have said they would not change their policies or forecasts until those risks are realized.

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