Federal Reserve raises interest rates

Federal Reserve raises interest rates

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%.

The Federal Reserve took note of a resilient USA economy Wednesday by raising its benchmark interest rate for the second time this year and signalling that it may step up its pace of rate increases.

United States interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. The Fed is raising rates gradually to keep the economy in check. The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged from the previous forecast.

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. The action means consumers and businesses will face higher loan rates over time.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank's 2% target, hitting 2.1% this year and remaining there through 2020.

The Fed cited the strength of the economy in its statement announcing the rate hike.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

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Policy makers said in a one-page statement that the labor market "has continued to strengthen" and than economic activity "has been rising at a solid rate". The Fed's new projection sees inflation at 2.1 percent, compared with 1.9 percent in its March forecast.

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. Officials also said that "indicators of longer-term inflation expectations are little changed". That's weaker than the White House's forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability". Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced".

Fast-forward to April of this year when data showed that US job openings jumped to a record high, far outpacing hiring.

In its updated forecasts, the Fed envisions stronger growth this year, with the economy expanding 2.8 percent, up from the 2.7 percent it predicted in March.

Others reckon the policymakers may refrain from signalling changes to ECB's stimulus program given Italy's political plight and a recent spate of disappointing data in the euro zone.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish.

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