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US Fed raises key interest rate

US Fed raises key interest rate

The Federal Reserve voted Wednesday to raise interest rates by one-quarter of a percentage point, in the central bank's first policy meeting led by its new chairman, Jerome "Jay" Powell.

The Federal Reserve is raising its benchmark interest rate to reflect a solid USA economy and signalling that it's sticking with a gradual approach to rate hikes for 2018 under its new chair, Jerome Powell.

Fed policymakers now project USA economic growth of 2.7% in 2018, up from the 2.5% forecast in December, and have also marked up growth for next year.

In the Fed's projections, this would be accompanied by inflation that rises to - and just temporarily above - the 2 percent target the central bank has set.

The Fed anticipates hiking rates three more times in 2018, part of an ongoing move away from the extraordinary measures it took to stimulate the economy during and after the Great Recession.

But they seem to believe that a more aggressive shift toward higher interest rates will be needed to keep that benign future intact.

"We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that". Early estimates of growth in the current March quarter point to a slowing to 1.8% rate from the 2.5% annual pace reported for the December quarter of 2017.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

The Fed raised the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.5 percent to 1.75 percent.

While the Fed sounded mildly hawkish with a slightly steeper projection of rates for the next two years, it was compensated for by an improved growth outlook.

By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion, he said. Because the economy is growing significantly faster than expected, officials see rising pressure on resources which could mean more changes to come.

The statement also declared, in a change from January, that "the economic outlook has strengthened in recent months".

Moreover, with President Donald Trump's announcement of tariffs of 25% and 10% on steel and aluminium, trade war threats are looming and may further impinge on the way foreign investors allocate funds for emerging developing economies. Unemployment is now expected to fall to 3.8 percent this year and 3.6 percent in 2019, which would be the lowest level in decades.

"There is no sense in the data that we are on the cusp of an acceleration of inflation".

The U.S. economy will grow at 2.7 percent in 2018 and 2.4 percent in 2019, higher than previous projections of 2.5 percent and 2.1 percent, respectively, according to the Fed's forecasts released on Wednesday.