US Fed raises interest rates, expects 2 more hikes this year

The Federal Reserve on Wednesday raised its benchmark interest rate a quarter percentage point, marking the seventh such move since the end of 2015.

And a majority of policy makers said they now expect a total of four interest rate increases this year. For 2020, the Fed foresees a median rate of 3.4 per cent.

The Fed move came after a two-day meeting where its members discussed the robust state of the USA economy and the potential impact of a trade war amid rising tension between the U.S. and its largest trading partners.

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.

Yields rose after Fed officials raised their estimates for the pace of growth and inflation this year while also lowering their estimate for the unemployment rate.

Fed officials had been split about whether to raise rates three times this year or four. Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

The US economy continues to strengthen, the Fed indicated, and it no longer needs the historically low interest rates that were put in place in the aftermath of the financial crisis to stimulate growth.

"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective".

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

Opinion was more divided about 2019's increases, however, although the median outcome was in line with the Fed's own forecasts for three hikes. 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.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory. Prices did not spike in response to the huge monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy. But if it miscalculates and overdoes the credit tightening, it can trigger a recession. It would also allow the Fed to be less choreographed and more spontaneous in cutting or raising rates as economic conditions warrant. 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.

A global trade war would risk cutting into US economic growth by depressing American export sales and raising inflation by making consumers and businesses pay more for imports. European Central Bank officials meet on Thursday to discuss for the first time when to end their bond-buying program although they may delay an announcement until July.

  • Wendy Palmer