Fed raises rates by 25 bps to1.25-1.50%, keeps target rate at 2.8%

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14 December 2017

The US Federal Reserve on Wednesday raised policy interest rates by a quarter of a percentage point while keeping the long-term rate at 2.8 per cent, but left its rate outlook for the coming years unchanged even as policymakers projected a short-term acceleration in US economic growth.

The Federal Open Markets Committee (FOMC) decided to raise the target range for the federal funds rate to 1.25 to 1.50 per cent, in view of the realised and expected labour market conditions and inflation. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 per cent inflation.

Having raised its benchmark overnight lending rate three times this year, the Fed projected three more hikes in each of 2018 and 2019 before a long-run level of 2.8 per cent is reached.

The Fed also said that, as of January, it would raise the amount of Treasury bonds and mortgage-backed securities that it would not reinvest on a monthly basis to $12 billion and $8 billion, respectively. That is consistent with its balance sheet reduction plan.

The FOMC noted that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. But for hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters.

The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.

On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 per cent.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

The Committee expects economic conditions to evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The move, coming at the final policy meeting of 2017 and on the heels of a flurry of relatively bullish economic data, represented a victory for a central bank that has vowed to continue a gradual tightening of monetary policy.

Fed expects US gross domestic product to grow 2.5 per cent in 2018, up from the 2.1 per cent forecast in September, while the unemployment rate is seen falling to 3.9 per cent next year, compared to 4.1 per cent in the last set of projections.

But inflation is projected to remain shy of the Fed's 2 per cent goal for another year, with weakness on that front remaining enough of a concern that policymakers saw no reason to accelerate the expected pace of rate increases.

That means that the Trump administration's tax overhaul, if passed by Congress, will have neutral effect on inflation.





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