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

Fed Raises Interest Rates, Signals Faster Hikes on the Way

Fed Raises Interest Rates, Signals Faster Hikes on the Way

"In view of realized and expected labor market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 percent", read a portion of a Federal Open Market Committee statement released Wednesday afternoon.

America's official interest rate has risen for the second time this year, and is now firmly higher than Australia's.

And a majority of policy makers said they now expect a total of four interest rate increases this year. 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. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages".

But, he added, "We really don't see it in the numbers". "I think it's more just, we are just looking at the economy and what does it need and how do we sustain the expansion, keep the labour market strong and try to keep inflation near 2 percent".

Trump's imposition of tariffs on steel and aluminum imports has enraged USA allies.

The unemployment rate is 3.8%, the lowest since 2000 and tied for the lowest reading since 1969.

Policy makers said in a one-page statement that the labor market "has continued to strengthen" and than economic activity "has been rising at a solid rate". Finally, the median Fed funds rate for the end of 2020 was heldat 3.4%. 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. The committee's forecast for the long-run sustainable growth rate of the economy held at 1.8 per cent, suggesting policy makers are skeptical of the effect of tax cuts on the economy's capacity for growth. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late past year.

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. Fed officials had been split about whether to raise rates three times this year or four.

The Fed aims to achieve its mandates of maximizing employment and stabilizing prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat.

The Fed's meeting this week is to be followed by policy meetings of two other major central banks - the European Central Bank on Thursday and the Bank of Japan on Friday. Prices did not spike in response to the huge monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy.

The current economic expansion is the second-longest in US history, and will set a record if it lasts a bit more than a year longer.

The decision reflected an economy that's getting even stronger. All those countries have vowed to retaliate against any US tariffs with their own penalties against USA goods.

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