Federal Reserve raises key rate and foresees two more hikes this year

07 April, 2018, 00:37 | Author: Brooke Harris
  • With futures markets anticipating another increase in June Jerome Powell’s Fed could leave its rate outlook unchanged until then to see how the economy absorbs the $1.8 trillion in stimulus expected from the Trump administration tax cuts and planned

At the two-day meeting, the Federal Open Markets Committee (FOMC) voted unanimously to raise the Federal Funds target range from 1.25%-1.5% to the 1.5%-1.75% band, in light of a strengthening economic outlook in recent months.

The Fed on Wednesday raised its benchmark fed funds rate (http://www.marketwatch.com/story/fed-lifts-rates-in-powells-first-meeting-says-outlook-has-strengthened-2018-03-21) as expected and signaled it's still on track to raise rates a total of three times in 2018.

The Federal Reserve raised interest rates by a quarter- point, its first rate hike this year, in a decision that was widely anticipated by markets.

The forecast table indicated that growth over the next three years should be greater than expected in December, the unemployment rate will be lower and most importantly, the funds rate is now projected to top out at 3.4%, not 3.1%. They forecast headline inflation of 1.9 percent for this year, 2 percent in 2019, and 2.1 percent in 2020.

The Fed hasn't increased rates four times in a year since 2006 and, in a news release Wednesday, it said only that it "expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate".

Higher rates are a boon for consumers who have money stashed in savings accounts, which are now offering the highest rates in more than seven years. His basic message was that the fiscal policies will continue to improve economic growth without an outsize increase in inflation.

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What does the hike mean for mortgage rates?

While U.S. unemployment of 4.1% is the lowest since 2000, wage growth has remained moderate and inflation has been below the Fed's target for most of the last five years. Many credit card loans already come with a variable interest rate pegged to Fed rate increases. Also, the number of hikes expected for 2019 has moved up from two to three.

But among the Fed officials who met in Washington this week, Powell said, "there's no thought that changes in trade policy should have any effect on the current outlook". This very rosy vision for the economy in 2020 depends, if you take their projections and comments at face value, on the Fed's stepping up its rate increases. Wednesday's forecast put the Fed long-term rate - the point at which its policies are neither boosting the economy nor holding it back - at 2.9 per cent. Officials hoped lower rates would prompt consumer spending and bank lending, among other things. Now let us discuss how this rate hike and commentary is going to impact India?

The Trump administration stoked fears of a tit-for-tat trade war earlier this month when it confirmed tariffs on steel and aluminium products from overseas.

"There is no sense in the data that we are on the cusp of an acceleration of inflation".

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