Mile­stone of sorts as Fed­eral Re­serve raises in­ter­est rates

Otago Daily Times - - BUSINESS & MONEY -

WASH­ING­TON: The Fed­eral Re­serve raised in­ter­est rates yes­ter­day, a move that was widely ex­pected but still marked a mile­stone in the US cen­tral bank’s shift from poli­cies used to bat­tle the 2007­09 fi­nan­cial cri­sis and re­ces­sion.

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

‘‘The econ­omy is do­ing very well,’’ Fed chair­man Jerome Pow­ell said in a press con­fer­ence af­ter the rate­set­ting Fed­eral Open Mar­ket Com­mit­tee re­leased its unan­i­mous pol­icy state­ment af­ter the end of a two­day meet­ing.

‘‘Most peo­ple who want to find jobs are find­ing them. Un­em­ploy­ment and in­fla­tion are low . . . The over­all out­look for growth re­mains favourable.’’

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.

Pol­i­cy­mak­ers’ fresh eco­nomic pro­jec­tions, also is­sued yes­ter­day, in­di­cated a slightly faster pace of rate in­creases in the com­ing months. Two more hikes are ex­pected by the end of this year, com­pared to one pre­vi­ously.

They an­tic­i­pate 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,’’ Aaron An­der­son, se­nior vice­pres­i­dent of re­search at Fisher In­vest­ments, said.

US Trea­sury yields rose af­ter the Fed’s de­ci­sion, while US stocks were trad­ing marginally lower and closed down on the day. The dol­lar pared some losses but was still trad­ing lower against a bas­ket of cur­ren­cies.

Mr Pow­ell also an­nounced the cen­tral bank would start hold­ing news con­fer­ences af­ter ev­ery pol­icy meet­ing next year, which means a to­tal of eight in 2019. Four such events are held each year cur­rently. Fed pol­i­cy­mak­ers pro­jected gross do­mes­tic prod­uct would grow 2.8% this year, slightly higher than pre­vi­ously fore­cast, and dip to 2.4% next year, while in­fla­tion is pre­dicted to hit 2.1% this year and re­main there through 2020.

That is a wel­come change from re­cent years when Fed pol­i­cy­mak­ers fret­ted about an in­fla­tion rate well below tar­get.

The un­em­ploy­ment rate, at present at an 18­year low of 3.8%, is ex­pected to fall to 3.6% this year, com­pared to the 3.8% that the Fed pro­jected in March.

‘‘The labour 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.’’

The Fed’s short­term pol­icy rate, a bench­mark for a host of other bor­row­ing costs, is now roughly equal to the rate of in­fla­tion, a vic­tory of sorts in the cen­tral bank’s bat­tle in re­cent years to re­turn mone­tary pol­icy to a nor­mal foot­ing. — Reuters.

PHOTO: REUTERS

Fed­eral Re­serve chair­man Jerome Pow­ell.

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