Published: Wed, June 13, 2018
Economy | By Shawn Conner

Fed raises interest rates as unemployment nears record lows

Fed raises interest rates as unemployment nears record lows

The Fed's new forecast showed inflation inching up only slightly over the next 2 1/2 years.

Federal Reserve Chairman Jerome Powell announced Wednesday that as from January 2019, he will hold press conferences after every policy meeting.

Inflation, which has been mysteriously low during the long economic recovery, has finally passed 2%, the level the Fed considers healthy.

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The Fed's latest projections show unemployment falling to 3.6 percent in 2018.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run. That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said before the Fed made its announcement that policymakers are "scared of future inflation risk". Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group. Inflation by the Fed's preferred gauge would hit its target of 2 percent this year and edge up to 2.1 percent over the next two years. 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.

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Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years.

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth. The U.S. central bank is also more optimistic on economic growth and further strength in the labor market. While Japan's central bank isn't expected to make any major policy shifts, anticipation is rising that the ECB may outline as early as this week plans to begin paring its bond-buying stimulus program as a prelude to ending them altogether.

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