Wed | Oct 17, 2018

Fed raises key interest rate

Published:Wednesday | June 13, 2018 | 11:04 PM
US Federal Reserve Board chairman Jerome Powell.

The US Federal Reserve took note of a resilient United States economy Wednesday by raising its benchmark interest rate for the second time this year and signalling that it may step up its pace of rate increases.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast. The action means consumers and businesses will face higher loan rates over time.

The central bank raised its key short-term rate by a modest quarter-point to a still-low range of 1.75 per cent to 2 per cent. 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.

Economists said the Fed left little doubt that it's prepared to increase the pace of its credit tightening.

"The labour market is getting tighter, and price pressures are picking up," said Greg McBride, chief financial analyst at Bankrate.com. "The Fed is prepared to be quicker about pushing rates higher."

It was the Fed's seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.

The announcement helped resolved a debate in financial markets over whether the Fed under Jerome Powell, who succeeded Janet Yellen as chairman in February, might see a need to signal a possible acceleration in rate hikes. The statement the Fed issued Wednesday after its latest policy meeting ended suggested that he does.

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. The Fed had previously said its key rate "is likely to remain, for some time, below levels that

are expected to prevail in the longer run."

new projection

The Fed's new projection for the pace of rate hikes shows four rate this year and three in 2019 - both unchanged from its previous forecast in March - and one in 2020, down from the two that had been projected previously.

The new median forecast projects the benchmark rate at 3.1 per cent by the end of 2019, up from 2.9 per cent in the previous forecast. For 2020, the Fed foresees a median rate of 3.4 per cent. That means that by then, it thinks its key rate will finally exceed the 2.9 per cent it sees as neutral - as neither stimulating nor restraining growth. Should the Fed's expectations prove accurate, its policy would then be intended to slow the economy.

In its updated forecasts, the Fed envisions stronger US growth this year - 2.8 per cent, up from the 2.7 per cent it predicted in March. Inflation by the Fed's preferred gauge would hit its target of 2 per cent this year and edge up to 2.1 per cent over the next two years.

AP