Fed Raises Interest Rates, Signals Faster Hikes on the Way

Fed Raises Interest Rates, Signals Faster Hikes on the Way

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the USA central bank's shift from policies used to battle the 2007-2009 financial crisis and recession.

Given how easy financial conditions are at present, particularly against a backdrop of ultra-low unemployment, faster economic growth, and building wage and inflationary pressures, it wouldn't surprise if some FOMC members up their year-end forecasts for interest rates, something that would likely see the median rate hike forecast lift from three to four moves this year.

The central bank raised the federal funds rate to a 1.75-2 percent target range, the second increase under Fed Chairman Jerome Powell.

It is the seventh time the bank has raised rates since 2015.

The Fed's new projection for the pace of rate hikes shows four rate this year and three in 2019 - both unchanged from its previous forecast in March - and one in 2020, down from the two that had been projected previously. In its statement the central bank said that "economic activity has been rising at a solid rate".

United States interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. That could spark higher inflation. The media forecasts expect the unemployment rate to drop to 3.6% this year, down from March's projection of 3.8%.

So-called core inflation - which excludes volatile items like energy and housing - is now 2.2 percent, around the level the Fed is looking for.

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

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory. The action means consumers and businesses will face higher loan rates over time.

Rates for conventional mortgages are likely to see more gradual change.

In a technical move, the central bank also made a decision to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.