Federal Reserve lifts interest rates, Wall Street slips on faster rate hikes

Federal Reserve chairman Jerome Powell

Federal Reserve chairman Jerome Powell

The Federal Reserve raised interest rates for the second time this year, taking the range of its Federal Funds Rate from 1.75pc to 2pc, up by 0.25 percentage points.

The decision to raise rates comes as the U.S. 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 Fed now sees gross domestic product growing 2.8% this year, slightly higher than previously forecast, and dipping to 2.4% next year, unchanged from policymakers' March projections.

Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period.

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly", the Fed wrote in its statement on Wednesday announcing the interest rate hike.

After nine years of steady if uneven recovery, the United States is now growing at a pace topping 4 percent, unemployment is as low as it has been this century, and inflation has safely edged up toward an official target.

So-called core inflation - which excludes volatile items like energy and housing - is now 2.2 percent, around the level the Fed is looking for.


It is the seventh time the bank has raised rates since 2015. Inflation expectations are slightly higher this year compared to March's forecast of 1.9%.

The use of the terms "symmetric" and "medium term" is a clear indication the Fed is not in a hurry to get inflation to 2 per cent, and will be comfortable if prices rise above that level for a short time. Finally, the median Fed funds rate for the end of 2020 was heldat 3.4%. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.

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.

And a majority of policy makers said they now expect a total of four interest rate increases this year.

USA central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 per cent" would help anchor long-run inflation expectations around the target.

The FOMC's economic growth forecasts were little changed, with 2018 GDP seen rising 2.8 per cent rather than 2.7 per cent, but unchanged at 2.4 per cent in 2019, and 2 per cent in 2020.

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