Fed Lifts Interest Rates, Expects 3.6% Unemployment


Fed Lifts Interest Rates, Expects 3.6% Unemployment

Interest rates are going up again as the economy gets hotter. The number viewing three or fewer hikes as appropriate fell to seven from eight. With higher interest rates, this means that real interest rates will push higher. Interest rates on new fixed-rate mortgages could also climb.

Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the United States jobs market as "strong" and said economic activity had been rising at "a solid rate". They removed previous language that the rate "is likely to remain, for some time, below levels that are expected to prevail in the longer run". Other changes included referring to "further gradual increases" instead of "adjustments". The statement the Fed issued Wednesday after its latest policy meeting ended suggested that he does. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced". In its statement the central bank said that "economic activity has been rising at a solid rate".

"The central bank raised its benchmark short-term interest rate a quarter of a percentage point on Wednesday, and indicated two more hikes will likely come this year", writes CNBC.

Fed Chair Jerome Powell will discuss the decision at a 2:30 p.m. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it.

The central bank also lifted its growth forecast to 2.8 per cent this year, up a small amount from its projection of 2.7 per cent annual growth in March. US payrolls expanded by more than 1 million workers in the first five months of 2018, reaching the milestone faster than in the previous two years.

The Fed's latest projections show unemployment falling to 3.6 percent in 2018.

They see another three rate increases next year, a pace unchanged from their previous forecast. Estimates of the long-run sustainable unemployment rate were unchanged at 4.5 per cent.

Yields have been climbing this year, as markets position for a relatively more aggressive Fed amid inflation concerns.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.25 percent in early trade.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in USA history while meeting inflation and employment objectives", said Stephen Gallagher, chief US economist at Societe Generale.

The FOMC's economic growth forecasts were little changed, with 2018 GDP seen rising 2.8 per cent rather than 2.7 per cent, but unchanged at 2.4 per cent in 2019, and 2 per cent in 2020.

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