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US Federal Reserve raises key interest rate to 1.75-2%, signals 2 more rate hikes this year

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The US Federal Reserve raised the benchmark lending rate on Wednesday, the second increase of the year, and signalled it will be more aggressive about rate increases this year and next amid "strong" economic growth.

[WASHINGTON] The US Federal Reserve raised the benchmark lending rate on Wednesday, the second increase of the year, and signalled it will be more aggressive about rate increases this year and next amid "strong" economic growth.

The unanimous vote brings the federal funds rate to a range of 1.75 to 2 per cent, but the quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4 per cent rather than the 2.1 per cent projected in March.

That implies four total rate increases this year.

The Fed last raised the benchmark in March, the sixth increase since December 2015, as it tries to keep the economy growing at a sustainable pace without fuelling inflation.

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The median forecast of members of the Fed's rate-setting Federal Open Market Committee (FOMC) puts the benchmark at 3.1 per cent at the end of 2019, up from the previous 2.9 per cent, which signals four hikes next year rather than three.

Wall Street was not happy by the aggressive new stance, and all three major indexes turned negative right after the announcement, with the Dow down 0.23 per cent.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

That shift came as a single FOMC member shifted his or her forecast for this year and next, breaking a virtual tie in the projections released in March.

MORE PRESS CONFERENCES 

At his post-meeting press conference, Fed Chairman Jerome Powell also announced that he will hold a press conference after every policy meeting, rather than the current quarterly schedule.

The change will start in January following the meetings that are scheduled roughly once every six weeks, to give the Fed "more opportunities to explain our actions," Mr Powell told reporters.

But he said "having twice as many press conferences does not signal anything about the timing or the pace of interest rate changes".

Economists had predicted the Fed would make this change to overcome the common view that the central bank will not change the benchmark interest rate at a meeting that does not include a press conference, which limits its options.

INFLATION MOUNTS 

The FOMC statement stressed that rising interest rates were unlikely to derail economic growth - which the committee now characterises as "strong" rather than "moderate" - and again made clear the Fed had some tolerance for inflation above its 2 per cent target.

In another slight change of language - something sure to catch the attention of Fed watchers - it said "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the Committee's symmetric two per cent objective over the medium term".

The use of the terms "symmetric" and "medium term" is a clear indication the Fed is not in a hurry to get inflation to 2 per cent, and will be comfortable if prices rise above that level for a short time.

In its quarterly Summary of Economic Projections, officials projected the Fed's preferred inflation measure will accelerate only slightly, ending this year at 2.1 per cent rather than 1.9 per cent, and holding at that level through 2020.

That index currently is at 2 per cent but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed.

The Fed watches price measures closely to determine how fast to raise interest rates but has signalled that the 2 per cent target is not a ceiling, and that it would be comfortable with inflation rising slightly above that level for a time.

The FOMC's economic growth forecasts were little changed, with 2018 GDP seen rising 2.8 per cent rather than 2.7 per cent, but unchanged at 2.4 per cent in 2019, and 2 per cent in 2020.

The already historically low unemployment is projected to fall even further, ending the year at 3.6 per cent before settling at 3.5 per cent in 2019 and 2020.

Only eight of the participants voted on policy at this meeting, but all joined the discussion and submitted forecasts.

AFP