Fed hikes rates in shift from pre­vi­ous poli­cies

Shanghai Daily - - BUSINESS - (Reuters)

THE Fed­eral Re­serve raised in­ter­est rates on Wed­nes­day, a move that was widely ex­pected but still marked a mile­stone in the US cen­tral bank’s shift from poli­cies used to bat­tle the 2007-2009 fi­nan­cial cri­sis and re­ces­sion.

In rais­ing its bench­mark overnight lend­ing rate a quar­ter of a per­cent­age point to a range of 1.75 per­cent to 2 per­cent, the Fed dropped its pledge to keep rates low enough to stim­u­late the econ­omy “for some time” and sig­naled it would tol­er­ate in­fla­tion above its 2 per­cent tar­get at least through 2020.

“The econ­omy is do­ing very well,” Fed Chair­man Jerome Pow­ell said in a press con­fer­ence af­ter the rate-set­ting Fed­eral Open Mar­ket Com­mit­tee re­leased its unan­i­mous pol­icy state­ment af­ter the end of a two-day meet­ing.

“Most peo­ple who want to find jobs are find­ing them. Un­em­ploy­ment and in­fla­tion are low ... The over­all out­look for growth re­mains fa­vor­able.”

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 on­go­ing eco­nomic ex­pan­sion cou­pled with solid job growth has pushed the Fed to raise rates seven times since late 2015, ren­der­ing the lan­guage of its pre­vi­ous pol­icy state­ments out­dated.

Pol­icy-mak­ers’ fresh eco­nomic pro­jec­tions, also is­sued on Wed­nes­day, in­di­cated a slightly faster pace of rate in­creases in the com­ing months, with two ad­di­tional hikes ex­pected by the end of this year, com­pared to one pre­vi­ously.

They see an­other three rate in­creases next year, a pace un­changed from their pro­jec­tions in March.

“The Fed’s path of grad­ual rate hikes and slow (bal­ance) sheet re­duc­tion seems well es­tab­lished at this point. The tra­jec­tory of US in­fla­tion or the broader US econ­omy would likely need to change ma­te­ri­ally for the FOMC to de­vi­ate from that path,” said Aaron An­der­son, se­nior vice pres­i­dent of re­search at Fisher In­vest­ments.

Pow­ell also an­nounced the Fed would start hold­ing news con­fer­ences af­ter every pol­icy meet­ing next year, which means a to­tal of eight in 2019. The Fed chief cur­rently holds four such events each year.

Fed pol­icy-mak­ers pro­jected gross do­mes­tic prod­uct would grow 2.8 per­cent this year, slightly above pre­vi­ously fore­cast, and dip to 2.4 per­cent next year, while in­fla­tion is seen at 2.1 per­cent this year and re­main­ing there through 2020.

That’s a wel­come change from re­cent years when Fed pol­icy-mak­ers fret­ted about an in­fla­tion rate well be­low tar­get.

The job­less rate, now at an 18-year low of 3.8 per­cent, is set to fall to 3.6 per­cent this year, com­pared to the 3.8 per­cent the Fed pro­jected in March.

“The la­bor mar­ket has con­tin­ued to strengthen ... eco­nomic ac­tiv­ity has been ris­ing at a solid rate,” the Fed said in its state­ment. “House­hold spend­ing has picked up while busi­ness fixed in­vest­ment has con­tin­ued to grow strongly.”

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