US Federal Reserve hikes interest rates and signals more to come

The US Federal Reserve raised interest rates by a quarter point yesterday and signalled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.5% and 0.75%.

“In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range,” the central bank’s policy-setting committee said in its unanimous statement after a two-day meeting.

“Job gains have been solid in recent months and the unemployment rate has declined,” the Fed said, noting that market-based measures of inflation compensation had moved up “considerably”.

More significant was a fresh batch of Fed policymaker forecasts that indicated the current once-a-year pace of rate increases will accelerate next year.

With president-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed’s 2% target.

The Fed’s median outlook for rates rose to three quarter-point rises in 2017 from two as of September. That would be followed by another three increases in 2018 and 2019 before the rate levels off at a long-run ‘normal’ 3%.

That normal level is slightly higher from three months ago, a sign that the Fed feels the economy is still gaining traction.

The Fed continued to describe that pace as “gradual”, keeping policy still slightly loose and supporting some further improvement in the job market. It sees unemployment falling to 4.5% next year and remaining at that level, which is considered to be close to full employment.

The rate increase was the first since last December and only the second since the 2007-2009 financial crisis, when the Fed cut rates to near zero and deployed other tools such as huge bond purchases to stabilise the economy.


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