US Fed raises policy rate to 2-2.25%, promises more hikes
27 September 2018
The Federal Open markets Committee (FOMC) of the US Federal Reserve on Wednesday announced a hike in its benchmark overnight lending rate by 25-50 basis points to 2-2.25 per cent from the 1.75-2.0 per cent fixed in June, as it continued a shift away from years of soft money policy.
“In view of realised and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 per cent,” the US central bank stated in a release.
The committee plans to gradually increase the target range for the federal funds rate further, which, it said, is consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the projected 2 per cent target over the medium term.
The US central bank foresees another rate hike in December, three more next year, and one increase in 2020. That would put the benchmark overnight lending rate at 3.4 per cent, roughly half a percentage point above the Fed's estimated “neutral” rate of interest, at which rates neither stimulate nor restrict the economy.
That tight policy stance is projected to stay level through 2021, the timeframe of the Fed's latest economic projections.
Fed said risks to the economic outlook appear roughly balanced and the move is consistent with its aim of fostering maximum employment and price stability.
The committee said it would assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective to determine the timing and size of future adjustments to the target range for the federal funds rate.
The committee will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments, before effecting any rate hike in future.
Fed chairman Jerome H Powell, who was appointed by Trump and took over as Fed chairman earlier this year, said the central bank would remain independent. “We don't consider political factors or things like that,” the Fed chief said.
Wednesday's rate hike was the third this year and the seventh in the last eight quarters. Ahead of Wednesday's statement, traders put the chance of a rate increase at 95 per cent, according to CME Group.
The Fed's latest projections show the economy continuing at a steady pace through 2019, with gross domestic product growth seen at 2.5 per cent next year before slowing to 2.0 per cent in 2020 and to 1.8 per cent in 2021, as the impact of recent tax cuts and government spending fade.
Inflation was forecast to hover near 2 per cent over the next three years, while the unemployment rate is expected to fall to 3.5 per cent next year and remain there through 2020 before rising slightly in 2021. The jobless rate is currently 3.9 per cent.