Zambian Business Times
US hikes rates 25bps – 7 more projected in 2018 and 2019
The U.S. Federal Reserve raised its benchmark federal funds rate by another 25 basis points to a target range of 1.75 - 2.0 percent, as universally expected, and forecast that it would raise the rate another two times by the end of this year as inflation is accelerating faster than expected.
The U.S. central bank has now raised its key interest rate seven times since it began tightening its policy stance in December 2015 and by a total of 175 basis points. This year the rate has been raised twice by a total of 50 points following a hike in March.
The last time the fed funds rate was at 2.0 percent was in September 2008, the month before the Fed in a coordinated easing of global monetary conditions slashed its rate twice in three weeks by a total of 100 basis points as the global financial crises was intensifying.
In an update to its economic projects, the Fed's policy-making arm, the Federal Open Market Committee (FOMC), now expects the fed funds rate to average 2.4 percent this year, up from 2.1 percent forecast in March, and then to average 3.1 percent in 2019, up from 2.9 percent.
This implies a total of four rate hikes of 25 basis points this year and then another three hikes in 2019. For 2020 the fed funds rate is forecast to average 3.4 percent, unchanged from March.
"Information received since the Federal Open Market Committee met in May indicates that the labour market has continued to strengthen and that economic activity has been rising at a solid rate," the FOMC said, adding household spending has picked up and business investment is growing.
Inflation has also moved closer to the Fed's target of 2 percent and risks to the economic outlook appear roughly balanced, said the FOMC, which was unanimous in today's decision.
"The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term," it said.
The pace of U.S. economic growth has been accelerating for the last 7 quarters - boosted by tax cuts and higher federal spending - with annual growth of 2.8 percent in the first quarter of this year, while the jobless rate has dropped in the last two months to hit 3.8 percent in May.
The FOMC now sees the U.S. economy growing by 2.8 percent this year, up from 2.7 percent forecast in March, and by 2.4 percent in 2019 and 2.0 percent in 2020, unchanged.
Various measures of inflation in the U.S. have been picking up in recent months, with the headline inflation rate at 2.8 percent in May and the Fed's preferred gauge, core personal consumption expenditure (PCE), steady at 1.8 percent in April from March.
The FOMC raised its forecast for core PCE inflation to average 2.0 percent this year, up from 1.9 percent forecast in March. For 2019 and 2020 core PCE inflation is seen averaging 2.1 percent.