US Federal Reserve lifts rates amid stronger inflation

Federal Reserve expected to hike rates as Sterling slips

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".

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

"Job gains have been strong, on average, in recent months, and the unemployment rate has declined", the Fed said in its latest policy statement.

The federal government drastically upgraded its forecasted 2018 economic outlook Wednesday, saying the United States economy was rising at a "solid" rate; an increase from its previous prediction of "moderate" growth. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

"The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee's symmetric 2 per cent objective over the medium term", according to its statement following a meeting in Washington.

The specter of higher borrowing costs hit stocks while boosting USA bond yields and the dollar.

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Fed Chairman Jerome Powell announced during a press conference that he will hold such briefings after every policy meeting instead of quarterly as from January 2019. While the national economy appears to be on solid ground for 2018, the Fed must now consider how growing global trade disputes could slow USA growth. "The trajectory of U.S. inflation or the broader USA economy would likely need to change materially for the FOMC to deviate from that path", said Aaron Anderson, senior vice president of research at Fisher Investments.

The Fed watches price measures closely to determine how fast to raise interest rates but has signalled that the 2 per cent target is not a ceiling, and that it would be comfortable with inflation rising slightly above that level for a time.

They expect the core inflation rate to rise to roughly 2% this year.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year. And that means higher interest rates on plastic.

The rate move was not a surprise in any sense of the word, given that Fed funds futures were pricing in a 100% chance of a 25-bps hike today; as has become the expectation, the Fed changed its policy when it had a new Summary of Economic Projections in hand. The Fed is raising rates gradually to keep the economy in check as inflation creeps higher and the job market grows even tighter. Interest rates on new fixed-rate mortgages could also climb. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

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