Fed raises rate, says economy doing well

> US central bank signals another hike this year despite growing concerns over weak inflation

WASHINGTON: The US Federal Reserve raised its benchmark interest rate by a quarter point to 1.0-1.25% on Wednesday and signalled another increase remains likely this year, despite the recent spate of weak economic data.

In explaining this second rate hike of 2017 and plans for more increases in the coming months, Federal Reserve chief Janet Yellen ( pix) said the move reflected the progress in the world’s largest economy, which continues to add jobs at a solid pace.

“The economy is doing well, is showing resilience,” Yellen said in her quarterly press conference.

“We have a very strong labour market, an unemployment rate that’s declined to levels we have not seen since 2001. And even with some moderation in the pace of job growth, we have a labour market that continues to strengthen.”

And despite recent tepid price pressures, the Fed expects inflation to pick up – eventually, citing “one-off reductions” in certain categories such as cell phone services and prescription drugs as the reason for the recent lower readings.

Those factors mean the Fed’s preferred inflation measure will remain below the 2% target for some time, but will gradually rise to the target level over “the medium term.”

But coming on a day when the consumer price index and retail sales fell, in large part due to falling food and gasoline prices, but with widespread declines in other categories, some economists are saying the Fed is no longer basing its decision on the data, as it has repeatedly said.

“The third rate hike in seven months, coming not long after a relatively poor Q1 GDP print, suggests the Fed has become less datadependent in its monetary policy decisions,” Fitch Ratings chief economist Brian Coulton said.

One Federal Open Market Committee (FOMC) member, Minneapolis Federal Reserve Bank president Neel Kashkari, dissented from the decision, preferring to keep policy on hold for now.

Analysts in recent weeks have become increasingly doubtful there would be a third rate increase later this year, as inflation, consumption and other economic data have indicated the weakness seen in the first quarter has continued. Fed futures markets now put the chances for another rate increase this year to below 50%.

Chris Low of FTN Financial said the Fed “compromised” by continuing the rate increases despite falling inflation, but “the market expects the Fed to take a break”.

However, Yellen said business and household confidence remain quite strong, and echoed the statement from the Fed’s policy-setting FOMC, which repeated its confidence that the economy will continue to expand “at a moderate pace” even with further gradual rate increases. Asked about the criticism, Yellen said, “I don’t think ... the Fed’s credibility has been impaired.”

In a separate development yesterday, the Hong Kong Monetary Authority (HKMA) raised the base rate charged through its overnight discount window by 25 basis points to 1.50%.

HKMA chief executive Norman Chan warned residents to tread cautiously in the property market, where prices have scaled record highs, as mortgage repayments were likely to increase.

Hong Kong tracks US rate moves as its currency is pegged to the US dollar. – AFP, Reuters