Published: Thu, June 14, 2018
Money | By Ralph Mccoy

Fed interest rate: Federal Reserve hikes interest rate another quarter point today

Fed interest rate: Federal Reserve hikes interest rate another quarter point today

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.

"Rising interest rates will start taking a toll on borrowers that are already stretched to the limit with tight household budgets", said Greg McBride, the chief financial analyst at Bankrate.com.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation.

The Fed announcement helped resolved a debate in financial markets over whether the Fed under Jerome Powell, who succeeded Janet Yellen as chairman in February, might see a need to signal a possible acceleration in rate hikes.

Two additional rate hikes are predicted this year, for a total of four.

The new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

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In a technical move, the central bank also made a decision 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. Unemployment, now at an 18-year low of 3.8 per cent, would drop to 3.6 per cent by year's end and to 3.5 per cent in 2019 and 2020 - levels not seen in 49 years. Fed Chairman Jerome Powell said at a news conference that the USA economy has strengthened considerably since the 2007-08 recession and is in "great shape". "The Fed is prepared to be quicker about pushing rates higher". Fed officials had been split about whether to raise rates three times this year or four. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.

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". Paychecks aren't soaring, in other words, but at least most Americans are staying ahead of inflation.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

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". Officials also said that "indicators of longer-term inflation expectations are little changed".

"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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