Federal Reserve raises interest rates

Stephen Stanley chief economist at Amherst Pierpont and Bob Browne Northern Trust CIO discuss the

Stephen Stanley chief economist at Amherst Pierpont and Bob Browne Northern Trust CIO discuss the

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank's shift from policies used to battle the 2007-2009 financial crisis and recession. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it.

The central bank also signaled two more hikes are coming in 2018 and four in 2019, a possible sign of concern about accelerating inflation in the US. In a few hours, several banks will respond by raising their prime lending rate, the starting point of borrowing costs for nonmortgage loans like credit cards and auto loans.

This marks the seventh time the Fed has hiked rates since 2015, per Reuters, and is part of a slow process to return rates to normal levels. The first non-economist to run the Fed in more than three decades stood at a podium rather than sitting at a desk like Yellen and her predecessor, Ben Bernanke, did.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000. The Fed's new forecast showed inflation inching up only slightly over the next 2 1/2 years.

Fed officials voted unanimously on Wednesday to increase this key rate, which influences the flow and supply of money in the usa economy. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages". And that means higher interest rates on plastic. Notably, it also cut a line from the previous statement that said the Fed was likely to keep rates low "for some time".

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Federal Reserve Chairman Jerome Powell announced Wednesday that as from January 2019, he will hold press conferences after every policy meeting. This would improve the Fed's communication, Powell said. That indicates a slightly faster rate of increases than analysts had expected, reflecting the Fed's view that economy is in good shape.

Fed Chair Powell's press conference is still underway as we write.

Traders are paying close attention to the spread between the 2-year and 10-year yields. For 2020, the Fed foresees a median of 3.4 percent.

The Fed offered an improved forecast for unemployment this year, lowering its forecast to 3.6%. The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged from the previous forecast.

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".

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While a few items remain on the USA central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met.

USA companies are hiring at a rapid pace and consumer and business spending remains healthy, the Fed noted, and core inflation is finally expected to hit the central bank's target of 2 per cent this year.

The committee sees further declines the unemployment. Risks to the economic outlook appear roughly balanced.

This marks the highest level of interest rates in the United States since 2008, although the benchmark rate remains below the historical average. 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.

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