Federal Reserve hikes key interest rate for second time in 2018

Gladys Abbott
June 14, 2018

The Federal Reserve on Wednesday raised its benchmark interest rate a quarter percentage point, marking the seventh such move since the end of 2015.

And if the Fed raises rates two more times this year, it will boost interest paid on credit cards to roughly $10 billion in 2019, the report said.

The central bank's new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly", the Fed wrote in its statement on Wednesday announcing the interest rate hike. In its statement the central bank said that "economic activity has been rising at a solid rate". The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

With the unemployment rate at 3.8 percent - a level reached only twice before in the past half-century - Fed Chairman Jerome Powell and his colleagues have decided additional rate hikes will very likely be necessary later this year. He'll likely address the decision to hike rates and the Fed's views on the overall economic outlook.

Eight of 15 officials now expect at least four rate increases will be needed this year, up from seven in March and four in December.

On inflation, policy makers forecast a slight overshoot of their target starting in 2018 at 2.1 per cent, and running through 2019 and 2020, compared with a 2020 overshoot in March's projections.

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All three central banks (and the Bank of England) aim for inflation of about 2%, but in Japan and the Eurozone prices are rising substantially more slowly.

Some emerging market currencies stayed under pressure on worries higher US rates could prompt fund outflows from emerging markets to the United States.

In a technical move, the central bank also chose to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range.

Wholesale price inflation came in much hotter than expected which was in contrast to Tuesday consumer price index.

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

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico.

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