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Federal Reserve raises interest rates

15 June 2018
Federal Reserve raises interest rates

In view of realized and expected labor market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The US Federal Reserve interest rate hike is expected to have an impact on credit cards, mortgages, vehicle loans and bank savings accounts here. That indicates a slightly faster rate of increases than analysts had expected, reflecting the Fed's view that economy is in good shape.

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 unanimous vote brings the federal funds rate to a range of 1.75-2%.

A outcome of the policies pursued by the Fed, the ECB and the Bank of Japan since 2008 has been a significant increase in global debt - at government, corporate and household levels - as ultra-low rates and torrents of liquidity ignited a global borrowing binge. "In recessions. That's not what they're forecasting", said Seth Carpenter, chief US economist at UBS Securities and a former Fed official. The unemployment rate in May was 3.8%, its lowest since 2000, while inflation was just below the Fed's 2% target.

The Fed's twin mandate is to bolster employment while controlling inflation, and in the current environment more rate rises appear inevitable.

"No one really knows with certainty what the level of the natural rate of unemployment is", Powell told reporters Wednesday after raising interest rates for the second time this year. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it.

However, higher rates would help savers earn more interest on their deposits. While the national economy appears to be on solid ground for 2018, the Fed must now consider how growing worldwide trade disputes could slow USA growth.

The move was heavily anticipated by the market, but the strong pace of the USA economy could mean more rate hikes.

The risk for the United States is that the Fed is forced to raise rates faster and further than it envisages even as its pre-programmed winding down of a balance sheet swollen by its $US3.6 trillion of bond and mortgage-buying in the post-crisis period sucks liquidity out of the economy.

Rates for savers have tended to lag the Fed's hikes.

Powell also announced the central bank would start holding news conferences after every policy meeting next year, which means a total of eight in 2019.

The Fed's preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years. In the longer run, it maintained the forecast for 1.8% growth. The committee also cut their forecast for unemployment.

While a few items remain on the US central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly". At this point, there's been little evidence that wage or price inflation is accelerating. 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 labour market conditions, and inflation near the Committee's symmetric 2 per cent objective over the medium term.

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U.S. unemployment dropped to 3.8% in May, its lowest level since April 2000 and one of the lowest levels since the second world war.

Another factor that could add inflationary pressures is the uncertainty over trade.