Fed raises key interest rate, suggests more hikes coming

Reuters

Reuters

The Federal Reserve has hiked the short-term interest rate a quarter of a percentage point, to a range of 1.75% to 2%, and suggested that two more increases are likely to occur this year, for a total of four in 2018, reports CNBC.

Powell faces a tricky balancing act as the Fed attempts to bring interest rates toward historical averages.

To be sure, the Fed is not inclined to hike rates any more than gradually after years of mostly over-optimistic predictions for inflation and economic growth, and disappointing wage gains of around 2.5 percent annually.

Updating their quarterly forecasts, officials projected the policy rate at 3.1 per cent at the end of 2019, according to their median estimate - compared with 2.9 per cent seen in March - and 3.4 per cent in 2020, unchanged from the prior forecast. "The Fed is prepared to be quicker about pushing rates higher".

Currently, Americans carry $984 billion in credit card and other revolving debt, and that number is expected to eclipse $1 trillion during the summer, a seasonal period that normally sees higher levels of card usage to pay for things such as vacations, day trips and other warm-weather activities. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally nearing the Fed's target level.

Trump's imposition of tariffs on steel and aluminum imports has enraged US allies. The unemployment rate in May was 3.8%, its lowest since 2000, while inflation was just below the Fed's 2% target.

Here's the Fed's full statement: "Information received since the Federal Open Market Committee met in May indicates that the labour market has continued to strengthen and that economic activity has been rising at a solid rate". Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating. The central bank is aiming to keep record low unemployment and a glut of federal spending from pushing inflation beyond the Fed's 2 percent target. Fed officials had been split about whether to raise rates three times this year or four. Prices did not spike in response to the enormous monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

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. All those countries have vowed to retaliate against any US tariffs with their own penalties against USA goods.

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