Fed raises rates, Powell talks future plans

Jermaine Castillo
June 14, 2018

The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level.

That also means cardholders soon will be forking over even more money in interest payments annually, an estimated $2.2 billion alone for what's expected to be the Federal Reserve's second rate hike of the year, according to the June Credit Card Debt Report from CompareCards.

"In view of realized and expected labor market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 percent", the Fed said in a statement.

The unanimous vote brings the federal funds rate to a range of 1.75 to 2 per cent, but the quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4 per cent rather than the 2.1 per cent projected in March.

The Federal Reserve raised a key interest rate another quarter-point on Wednesday.

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Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years.

A decade after the recession, the Fed has made progress on its objectives. The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%. Most officials expect the Fed would need to raise rates at least three more times next year and at least once more in 2020, leaving rates in a range between 3.25% and 3.5% by the end of 2020, the same end point officials projected in March.

The latest rate increase was in line with investors' expectations ahead of the release of the policy statement. That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed.

The Fed 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. "This change is only about improving communications". The Fed previously nudged rates up in March.

"Having twice as many press conferences does not signal anything about the pace or timing of future interest rate changes", Powell said.

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"For the first time in many years, the Fed has nearly complete confidence about the outlook", said Michael Gapen, chief US economist at Barclays Capital Inc.in NY.

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy. In fact, the Fed didn't change its median longer-run growth estimate of 1.8 percent. That's weaker than the White House's forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts. Inflation by the Fed's preferred gauge would hit its target of 2 percent this year and edge up to 2.1 percent over the next two years.

Policy makers said in a one-page statement that the labor market "has continued to strengthen" and than economic activity "has been rising at a solid rate".

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability".

The Fed last raised the benchmark in March, the sixth increase since December 2015, as it tries to keep the economy growing at a sustainable pace without fuelling inflation. Risks to the economic outlook appear roughly balanced. The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March.

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Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

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