Fed Lifts Interest Rates, Expects 3.6% Unemployment

Jerome Powell chairman of the US Federal Reserve said there would be four rate hikes in 2018

Jerome Powell chairman of the US Federal Reserve said there would be four rate hikes in 2018

The US Federal Reserve raised the benchmark lending rate on Wednesday, the second increase of the year, and signalled it will be more aggressive about rate increases this year and next amid "strong" economic growth.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

What took investors by surprise was the Fed's projection that it would increase rates twice in the next few months, which was faster than the market had expected. US growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months. After keeping interest rates low for years to boost growth, the central bank is now moving rates back to what economists say is a neutral position. "The Fed is prepared to be quicker about pushing rates higher".

But, he added, "We really don't see it in the numbers". The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level.

There's only two ways to limit the hit from higher borrowing costs: Pay off all your credit cards in full each month or spend less on your cards so you won't get penalized as much for purchases bought with money you don't have.

The policy statement bypassed discussion about the tensions over the Trump administration's trade policies, including a decision two weeks ago to impose tariffs on steel and aluminium imports from the European Union, Canada and Mexico.

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Officials lowered their jobless-rate estimates after unemployment fell to 3.8 per cent as of May, matching April 2000 as the lowest reading since 1969.

"Economic activity has been rising at a solid rate", the FOMC said in its statement. For 2020, the Fed foresees a median rate of 3.4 percent. Unemployment, now at an 18-year low of 3.8 percent, would drop to 3.6 percent by year's end and to 3.5 percent in 2019 and 2020 - levels not seen in 49 years. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late previous year.

This was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from nearly zero. Fed officials had been split about whether to raise rates three times this year or four. When the Fed tightens credit, it aims to do so without derailing the economy.

The economic expansion has survived for nine years and is now the second-longest in history. 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.

The decision reflected an economy that's getting even stronger. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on USA imports, which some studies show could cost the US close to 200,000 jobs.

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