US Fed goes for 25-bps hike on job gains, inflation data

THE US Federal Reserve raised interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank’s target.

The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 per cent to 1.00 per cent marked one of the Fed’s most convincing steps yet in the effort to return monetary policy to a more normal footing.

However, the Fed’s policysetting committee did not flag any plan to accelerate the pace of monetary tightening. Although inflation is “close” to the Fed’s 2 per cent target, it noted that goal was “symmetric,” indicating a possible willingness to allow prices to rise at a slightly faster pace.

Further rate increases would only be “gradual,” the Fed said in its policy statement, with officials sticking to their outlook for two more rate hikes this year and three more in 2018. The Fed lifted rates once in 2016.

Business investment “appears to have firmed somewhat,” the Fed said in language that reflected a stronger sense of the economy’s momentum.

Fresh economic forecasts released with the statement showed little change from those of the December policy meeting and gave little indication the Fed has a clear view of how the policies of Donald Trump’s administration may impact the economy in 2017 and beyond.

“With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace,” the Fed said, maintaining language it has used in previous statements.

Stock markets extended their gains and bond yields fell on the benign economic outlook and the continued steady path of interest rate rises signalled by the central bank.

“It relieves some of the fears we’ve had that perhaps the Fed was going to raise rates faster in the future. They’ve chosen not to signal that,” said Brad Mcmillan, Chief Investment Officer at Commonwealth Financial.

Further rate increases would only be “gradual,” the Fed said in its policy statement, with officials sticking to their outlook for two more rate hikes this year and three more in 2018