US Fed raises interest rates, expects 2 more hikes this year

Fed raises interest rates and signals faster hikes on the way	 	 	 			The Federal Reserve building

The Federal Reserve has raised its benchmark interest rate for the second time this year and signaled that it may step up its pace of rate increases because of solid us economic growth and rising inflation.

USA growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months.

The Federal Open Market Committee voted to lift the target range for the federal funds rate by 25 basis points to between 1.75% and 2%.

Fed officials also said they expect to raise rates twice more this year, faster than previously forecast. In its statement the central bank said that "economic activity has been rising at a solid rate". Year over year headline PPI jumped to 3.1% year over year versus 2.6% year over year, with the core rate at 2.4% year over year versus 2.3% year over year.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000.

The biggest change the Fed made was to signal that it intends to do two more rate hikes this year, instead of just one.

Some emerging market currencies stayed under pressure on worries higher US rates could prompt fund outflows from emerging markets to the United States. Interest rates on new fixed-rate mortgages could also climb. Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced". Inflation by the Fed's preferred gauge would hit its target of 2 percent this year and edge up to 2.1 percent over the next two years.

The consumer price index was up 2.8 percent from a year ago as of May according to Bureau of Labor Statistics numbers released on Tuesday.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in USA history while meeting inflation and employment objectives", said Stephen Gallagher, chief US economist at Societe Generale.

Yields earlier swung between gains and losses as investors awaited guidance about whether policy makers see enough pressure on prices to increase their projected pace of interest rate increases, or whether concerns about the ability of the economy to sustain its growth in coming years might lead to a pullback in forecasts of rate increases in coming years, analysts said.

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.

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