Saturday, 21 July, 2018

Federal Reserve Hikes Interest Rate

Federal Reserve Hikes Interest Rate Federal Reserve Hikes Interest Rate
Cristina Norman | 07 April, 2018, 00:45

On Wednesday, the Federal Reserve announced it will increase its benchmark interest rate to between 1.5% and 1.75%, and suggested rates would go up at least two more times in 2018.

In an unanimous decision, the Federal Open Market Committee, in its first meeting under new Chairman Jerome Powell, raised the short-term fed funds rate 25 basis points to a range of 1.5% to 1.75%.

First, and foremost, the Committee inserted into the statement the sentence, "The economic outlook has strengthened in recent months".

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S.

One clue can be found in a survey of FOMC members about what they expect the appropriate rate policy to be going forward.

Powell also expressed his concerns about the possibility of a trade war at the end of the Fed's two-day meeting.

The Fed predicts raise rates three times in total in 2018 element of an existent step away from the exceptional estimates it took to invigorate the economy during and after the Great Recession.

The US central bank projected late past year that it would lift rates three times in 2018, but some investors believe the fiscal stimulus and inflation pressures will push policymakers to add an additional increase to the mix.

"Job gains have been strong in recent months, and the unemployment rate has remained low", the FOMC said.

But the Fed's new forecast does envision somewhat stronger economic growth compared with its previous estimate: It raises the estimate to 2.7 percent growth this year, up from 2.5 percent in the December projection, and 2.4 percent in 2019, up from 2.1 percent. The two moves mean that many consumers and businesses will face higher loan rates over time. All eight of them voted for Wednesday's proposed raising of interest rates, in turn making the fiscal policy proposal law. But Powell has a history of voting to keep interest rates down, and that's what Trump wants Powell to continue to do as chairman.

Powell justified the Fed keeping its inflation forecast the same by noting that price pressures have been weak for years.

Unusually low inflation, combined with slow economic growth, helps explain why the Fed has steadily reduced its "longer run" fed funds target since 2012. Yes, there was some downgrading of the current conditions, indicating that the "growth rates of household spending and business fixed investment have moderated rom their strong fourth-quarter readings". Increasing rates is likely to choke off inflation by tightening the money supply, but this only works if the increased rate has a significant effect on the cost of borrowing.

The move to tighten the economy by lifting the benchmark overnight lending rate by a quarter of a percentage point (to a range of 1.5% to 1.75%) was made to keep in line with the central bank's 2% inflation target, given the growing confidence in the current USA economy.

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