US Federal Reserve raises key interest rate

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WASHINGTON: The Federal Reserve on Wednesday raised the key lending rate for the first time this year to its highest level in a decade, citing a stronger outlook for US economic growth.

Newly installed Fed Chairman Jerome Powell presided over his first meeting, which raised the federal funds rate to 1.5-1.75 percent, a move that will affect all types of loans, from homes to cars to student debt.

In his first press conference as Fed chief, Powell pointed to the factors that have boosted the economic outlook in recent months, including “more stimulative” fiscal policy, in the wake of the massive tax cuts Congress passed in December.

In addition, he said “ongoing job gains are boosting incomes and confidence (and) foreign growth is on a firm trajectory.”

That likely caused Fed officials to signal they expect a slightly more aggressive path for rate increases next year.


Still, Powell told reporters that even with rising interest rates, the world’s largest economy is “healthier than it has been since before the financial crisis. It’s a healthier economy than it has been in 10 years.”

However, he also acknowledged that central bankers now consider the prospects of a global trade war as a “more prominent risk” to the economic outlook.

President Donald Trump recently announced steep tariffs on aluminum and steel and is expected to take more tough action against Chinese goods this week, but Powell said officials did not specify whether rising trade frictions could impact growth or inflation.

In its quarterly forecasts, Fed officials project the benchmark interest rate will end this year at 2.1 percent, meaning two more hikes are likely, unchanged from the December forecast, but will rise to 2.9 percent at the close of 2019, implying three increases.

That would mean one more rate increase next year than previously expected, even though officials do not anticipate inflation to rise any faster. The Fed’s preferred inflation measure is forecast barely move up to 2.0 percent in 2019.

In fact, Powell said “there is no sense in the data that we are on the cusp of an acceleration of inflation.”

While the Fed is “very alert” to any increases that could result from the very low unemployment rate, which normally would be expected to drive wage increases, “it’s not something we observe at the present.”

Policymakers split
However, the range of estimates for the federal funds rate reveal officials are split almost exactly down the middle, with eight expecting no more than three rate hikes this year and seven projecting four moves or more.

Only eight of the 15 participants voted on policy at this meeting, but all join the discussion.

Central bankers see growth picking up this year and next, with GDP gaining 2.7 percent in 2018 and 2.4 percent in 2019.

In addition, the already historically low unemployment rate is seen falling even further, ending next year at a stunning 3.6 percent, according to the quarterly Summary of Economic Projections.

The Fed statement said monetary policy continues to provide stimulus to the economy, and repeated that even with “further gradual adjustments … economic activity will expand at a moderate pace.”

Central bankers admitted to being befuddled by the absence of inflation last year despite the economic recovery and strong job market, but Wednesday’s statement repeated the view that 12-month inflation is expected to move up to the Fed’s two percent goal “over the medium term.”

Powell avoided attempts to get him to comment on specific aspects of trade or fiscal policy, but he noted the likely growth boost from the recent tax cuts, and said there are aspects of the package that could help raise the potential growth rate.

“It’s important that we do something, do what we can as a country to increase our potential growth rate,” he said.

AFP

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