Fed Raises Interest Rates, Signals 2 More Hikes This Year

If core consumer price inflation surprises on the upside this week Amazon may be one of the culprits
If core consumer price inflation surprises on the upside this week Amazon may be one of the culprits
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14 June, 2018

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.

Federal Reserve Chair Jerome "Jay" Powell said job gains are boosting income and confidence, while foreign expansion and tax cuts support additional growth. The Fed previously nudged rates up in March. Prices did not spike in response to the huge monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy.

Also notable was that the Fed deleted about 80 words of its statement that said it expected the economy to "evolve in a manner that will warrant further gradual increases" in rates. "Fiscal policy played a role during the crisis, but monetary policy was at the forefront".

The FOMC statement stressed that rising interest rates were unlikely to derail economic growth - which the committee now characterises as "strong" rather than "moderate" - and again made clear the Fed had some tolerance for inflation above its 2 per cent target.

"I think we are far enough away now though that the risks are kind of balanced", he said. "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation".

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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.

The current economic expansion is the second-longest in US history, and will set a record if it lasts a bit more than a year longer. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages". It is not until the stimulus starts to fade in late 2019 to mid-2020 that a recession is likely, according to half of the respondents to a National Association of Business Economics survey. Another reason for caution is the White House's threats of more tariffs, including on its closest allies, raising questions over how worldwide trade will affect growth. In the longer run, it maintained the forecast for 1.8% growth.

The new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

The 3.8-percent jobless rate is close to the lowest level ever seen in the U.S. There are more job openings than workers seeking employment in the country for the first time in recorded history, and recent inflation data shows prices inching through the Fed's ideal threshold. The Fed anticipates that inflation will be 2.1% in 2019 and 2020, which is a little over its target rate of 2% through 2020, but is viewed as manageable.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded. "The labour market is on fire".


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