Fed raises key interest rate and sees possible acceleration in hikes

If core consumer price inflation surprises on the upside this week Amazon may be one of the culprits

Fed officials on Wednesday raised interest rates by a quarter point for the second time this year and upgraded their median forecast to four total increases in 2018, as unemployment falls and inflation overshoots their 2 percent target earlier than previously projected.

Most Federal Reserve officials now expect at least four rate increases this year, up from a previous projection in March of three rate increases, according to the Wall Street Journal.

The biggest change the Fed made was to signal that it intends to do two more rate hikes this year, instead of just one. It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020.

The Fed announced the rate rise at the close of a two-day meeting in Washington.

The Federal Reserve expects the US gross domestic product to grow by 2.8% in 2018, up from March's forecast of 2.7%.

This marks the seventh time the Fed has hiked rates since 2015, per Reuters, and is part of a slow process to return rates to normal levels.


He added that continued steady rate increases would nurture the expansion, as the Fed approaches a sort of sweet spot with its employment and inflation goals largely met, the economy withstanding higher borrowing costs and no sign of a spike in inflation.

The US economy continues to strengthen, the Fed indicated, and it no longer needs the historically low interest rates that were put in place in the aftermath of the financial crisis to stimulate growth. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher. The action means consumers and businesses will face higher loan rates over time.

Opinion was more divided about 2019's increases, however, although the median outcome was in line with the Fed's own forecasts for three hikes. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in US history while meeting inflation and employment objectives", said Stephen Gallagher, chief USA economist at Societe Generale. That reflects the fact that the United States recovery after the crisis has been stronger, and inflation is getting closer to the Fed's target.

Yields have been climbing this year, as markets position for a relatively more aggressive Fed amid inflation concerns. Prices did not spike in response to the vast monetary stimulus, nor has the job market cooled since 2015 when the Fed began tightening policy. The Fed previously nudged rates up in March. But if it miscalculates and overdoes the credit tightening, it can trigger a recession. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001. All those countries have vowed to retaliate against any USA tariffs with their own penalties against US goods.

The Fed's meeting this week is to be followed by policy meetings of two other major central banks - the European Central Bank on Thursday and the Bank of Japan on Friday.

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