Published: Thu, June 14, 2018
Economy | By Shawn Conner

Federal Reserve hikes key interest rate for second time in 2018

Federal Reserve hikes key interest rate for second time in 2018

This will raise borrowing costs for credit cards, auto financing, mortgages, and other loans, but help savers earn more interest on their deposits.

The Federal Reserve announced today that it would raise the target range for the federal funds rate by a quarter of a point.

The latest increase puts the federal funds rate in a range between 1.75 and 2 percent. In its statement the central bank said that "economic activity has been rising at a solid rate". The first non-economist to run the Fed in more than three decades stood at a podium rather than sitting at a desk like Yellen and her predecessor, Ben Bernanke, did. The Fed's latest projection now sees the unemployment rate dropping to 3.6 percent by the end of this year and dipping to 3.5 percent in the next two years.

Fed policymakers projected gross domestic product would grow 2.8 per cent this year, slightly higher than previously forecast, and dip to 2.4 per cent next year, while inflation is seen hitting 2.1 per cent this year and remaining there through 2020.

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Officials now expect four rate rises this year, not three as the balance of policymakers has shifted since March. In the United Kingdom, the Bank has stopped actively buying financial assets and interest rates are up a little from their lows. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages".

The Federal Open Market Committee indicated that even though it's stepping up the pace of interest-rate hikes, economic growth should continue apace. This is partly why a rate hike is expected; the Fed usually only hikes when there are pressers so the chair can talk about the decision. This would improve the Fed's communication, Powell said. It would allow the Fed to be less choreographed and more flexible in cutting or raising rates as economic conditions warrant.

"The main takeaway is that the economy is doing well", he said.

"For the first time in many years, the Fed has nearly complete confidence about the outlook", said Michael Gapen, chief USA economist at Barclays Capital Inc.in NY. This would leave rates between 3.25 percent and 3.5 percent by the end of 2020. But that exorbitant rate is likely to go up to 15.57% within two billing cycles, CompareCards says, as lenders pass along the higher rates to clients.

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In its updated forecasts, the Fed envisions stronger growth this year - 2.8 per cent, up from the 2.7 per cent it predicted in March. Job gains have been strong, on average, in recent months, and the unemployment rate has declined.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability". Risks to the economic outlook appear roughly balanced.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded. Estimates of the long-run sustainable unemployment rate were unchanged at 4.5 per cent.

"The labor market is getting tighter, and price pressures are picking up", said Greg McBride, chief financial analyst at Bankrate.com.

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