Thursday, 21 June, 2018

Fed Lifts Interest Rates, Expects 3.6% Unemployment

Federal Reserve Board Chairman Jerome Powell took office in February replacing Janet Yellen who left office having won plaudits for her stewardship of an economic recovery that produced low inflation and steady job growth Fed Chief Jerome Powell Goes Populist AFP 13 Jun 2018
Preston Stone | 14 June, 2018, 05:41

The US Federal Reserve raised the benchmark lending rate on Wednesday, the second increase of the year, and signalled it will be more aggressive about rate increases this year and next amid "strong" economic growth.

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.

At its June policy meeting today, the Federal Open Market Committee as was widely expected when they announced the main overnight benchmark rate would rise into the range of 1.75-2.00%. Economists generally expect growth to remain above 3 percent through year end, while Fed policymakers raised their forecast a touch to 2.8 percent on Wednesday.

"With a rate hike nearly fully priced in, the focus is on how many times the Fed will raise rates this year and next and how much beyond the levels it considers as neutral to the economy, or what they call the longer-run rates", said Shuji Shirota, head of macro economic strategy group at HSBC Securities in Tokyo.

"Economic activity has been rising at a solid rate", the FOMC said in its statement.

The Fed offered an improved forecast for unemployment this year, lowering its forecast to 3.6%.

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.

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But for now, the Atlanta Fed estimates the USA economy is roaring at a 4.6 percent rate, a level it reached only twice since the recession. In the United Kingdom, the Bank has stopped actively buying financial assets and interest rates are up a little from their lows.

- Fed funds price in an 81% chance of a 25-bps rate hike in September, and odds for December increased from 51% to 57% as Fed Chair Powell's press conference got under way. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced". The projections show inflation rising 2.1% for the next three years.

In comparison, the Reserve Bank kept Australia's official cash rate at 1.5 per cent, its record low for the past 20 months. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

The broader S&P 500 tumbled by 0.4 per cent, while the technology-focused Nasdaq index dropped by a slight 0.1 per cent. They signaled previously that they wouldn't overreact if inflation overshot the target, but they haven't said how much of an overshoot they will tolerate, or for how long.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

The median estimate for economic growth this year rose to 2.8 per cent from 2.7 per cent in March, with projections unchanged for 2.4 per cent in 2019 and 2 per cent in 2020.

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