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Fed hikes interest rates again, raises outlook for more increases in 2018

14 June 2018

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank's shift from policies used to battle the 2007-2009 financial crisis and recession. That puts the Fed on track for four rate hikes total in 2018, something the Fed hasn't done since 2006.

That view was in line with fresh Fed forecasts that showed most of its policymakers believe at least four rate hikes would be appropriate this year.

While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end. In a few hours, several banks will respond by raising their prime lending rate, the starting point of borrowing costs for nonmortgage loans like credit cards and auto loans.

This was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from nearly zero.

Along with rising interest rate expectations.

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico.

However, higher rates would help savers earn more interest on their deposits.

Also notable was that the Fed deleted about 80 words of its statement that said it expected the economy to "evolve in a manner that will warrant further gradual increases" in rates.

At a news conference, Powell sought to portray the Fed's actions as evidence mainly that the economy is doing well and not that the central bank is eager to accelerate its rate increases. "This change is only about improving communications".

We can think of times when the Federal Open Market Committee has behaved as if its members were smoking something, but we think it's safe to say that interest rates aren't high now.

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.

The Federal Reserve expects the USA gross domestic product to grow by 2.8% in 2018, up from March's forecast of 2.7%. 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.

The Fed anticipates that inflation will overshoot its 2% target this year; in March, officials saw that happening only in 2020.

In the U.S., Fed officials are setting policy for an economy that's being boosted by $1.5 trillion in tax cuts and a $300 billion increase in federal spending, while unemployment has fallen to levels that match the lowest since 1969.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. 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 unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March. "The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric 2 per cent objective over the medium term", according to its statement following a meeting in Washington. Risks to the economic outlook appear roughly balanced. The index rose 1.8 per cent in April from a year earlier.

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.

Fed hikes interest rates again, raises outlook for more increases in 2018