Finance

Federal Reserve raises interest rates

Federal Reserve raises interest rates

Fed Chair Jerome Powell underscored his own satisfaction with the recovery in his remarks on Wednesday, saying the economy was in "great shape" and even going so far as to hint that he no longer feels constrained by the Janet Yellen-era fear of slipping back to zero interest rates.

As widely anticipated, the Federal Reserve has raised its short-term federal fund rate - what banks charge each other- by 0.25 points to a range of 1.75 to 2 percent. And their rate increases are addressing the "perceived threat of inflation", not an immediate inflation problem, he said. The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level. At the same time, they project the unemployment rate to fall to 3.6 percent this year, down from earlier projections of 3.8 percent.

Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the USA jobs market as "strong" and said economic activity had been rising at "a solid rate".

In its updated forecasts, the Fed envisions stronger growth this year - 2.8 per cent, up from the 2.7 per cent it predicted in March.

Powell was speaking at a press conference after the Fed announced its decision to raise interest rates.

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

That is a welcome step-up from the roughly 2-percent growth averaged throughout the recovery, which was plagued by a series of crises overseas and uncertainties at home, delaying the Fed's tightening plans.

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. That's weaker than the White House's forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years. In its statement the central bank said that "economic activity has been rising at a solid rate". At this point, there's been little evidence that wage or price inflation is accelerating.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability". Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced". The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March.

That's a welcome change from recent years when Fed policymakers fretted about an inflation rate well below target. "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation". This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments.