Fed Lifts Rates and Forecasts a Steeper Path of Hikes
By Kamen Parushev - Research Analyst
The Federal Open Market Committee (FOMC), led by Jerome Powell in his first meeting as chairman, voted to raise its benchmark funds rate by a quarter percentage point to a range of 1.5% to 1.75%.
The hikes are in line with the FOMC’s plans for gradual tightening and further adjustments in the stance of monetary policy amid a robust increase in economic activity and continuous improvement in the labour market.
“The economic outlook has strengthened in recent months,” the policy-setting Committee said in a statement on Wednesday.
The labor market has continued to strengthen and the economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed at 4.1% - the lowest rate since December 2000. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings when private fixed investment increased by 7.25% year-over-year. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2%. Market-based measures of inflation compensation have increased in recent months but remain low while survey-based measures of longer-term inflation expectations are little changed.
After three target rate increases in 2017, this is the first rate hike in 2018 and the sixth rate hike since the policymaking Committee began raising rates off near-zero in December 2015. According to the summary of economic projections that the FOMC releases each quarter, three rate hikes is still the baseline for this year. The Fed officials also forecast a steeper path of hikes in 2019 and 2020 against the backdrop of improving economic outlook
Central bankers raised their forecast for 2017 GDP growth from 2.5% in December to 2.7%, and increased the 2018 expectation by 0.3 percentage points - from 2.1% to 2.4%. However, growth is likely to cool after, with the 2020 forecast holding at 2% and the longer-run measure still at the moderate 1.8%.
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