Federal Reserve raises interest rates for sixth time since financial crisis

07 April, 2018, 00:43 | Author: Sheri Evans
  • Fed raises key interest rate by a quarter-point

THE dollar retreated from three-week highs on Wednesday as traders took some profits before the Federal Reserve's first expected rate rise of 2018 and focused on whether it will indicate three or four increases are likely this year.

"The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC's 2 percent longer running goal", Jerome Powell, chairman of the Fed, said in his first press conference since taking on the role.

There's growing concern among economists that the GOP tax cuts and the additional boost in federal government spending could cause the US economy to overheat, requiring the Fed to hike rates even more than three times this year.

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The US Federal Reserve has raised its benchmark interest rate by a quarter of a percentage point and signalled two more hikes in 2018 as it pointed to a strengthening US economy. Most importantly, the Committee indicated there could be three if not four hikes this year and next and the rate at which the funds rate could top out at is also higher than previously projected. Additionally, the labor force participation rate moved slightly higher last month, which the head of the central bank noted is particularly positive considering an aging labor force is exerting downward pressure on the metric. There have been moderate increases in wages and price inflation, but the Fed is "very alert" to any increases that could result from the very low unemployment rate. Early estimates of growth in the current March quarter point to a slowing to 1.8% rate from the 2.5% annual pace reported for the December quarter of 2017. Not only did the FOMC raise the funds rate target, which was totally expected, it sent some pretty clear signals about future rate hikes. He said he remained moderately bullish on the dollar, because the Fed's raising rates faster than other central banks supported the currency.

In a bit of a twist, the Fed now plans to raise rates three times in both 2018 and 2019.

A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates. Unemployment was expected to dip to 3.9 percent this year and next before returning to 4 percent. In the words of the FOMC statement, "the Committee made a decision to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent".

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But the Fed's new forecast does envision somewhat stronger economic growth compared with its previous estimate: It raises the estimate to 2.7 percent growth this year, up from 2.5 percent in the December projection, and 2.4 percent in 2019, up from 2.1 percent.

The Trump administration stoked fears of a tit-for-tat trade war earlier this month when it confirmed tariffs on steel and aluminium products from overseas. "It's not something we observe at the present", Powell said.

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