Fed Lifts Interest Rates, Expects 3.6% Unemployment

USA interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation.

According to CNBC, the Reserve released new data this week showing the GDP forecast rose to almost 3%, up from the previous predictions of 2.7%.

The central bank raised the federal funds rate to a 1.75-2 percent target range, the second increase under Fed Chairman Jerome Powell.

Read the full report at CNBC. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally reaching the Fed's 2 percent target level.

The Federal Reserve expects the USA gross domestic product to grow by 2.8% in 2018, up from March's forecast of 2.7%.

This marks the highest level of interest rates in the United States since 2008, although the benchmark rate remains below the historical average.

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With Federal Reserve Chairman Jerome Powell lauding an economy that he sees doing "very well", members of the Federal Open Market Committee also ratcheted up the number of rate increases they expect this year by one from their previous projections. Economists generally expect growth to remain above 3 percent through year end, while Fed policymakers raised their forecast a touch to 2.8 percent on Wednesday. The rate is closely tied to adjustable-rate loans, such as home-equity lines of credit and credit cards.

Officials lowered their jobless-rate estimates after unemployment fell to 3.8 per cent as of May, matching April 2000 as the lowest reading since 1969.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond". The committee's forecast for the long-run sustainable growth rate of the economy held at 1.8 per cent, suggesting policy makers are skeptical of the effect of tax cuts on the economy's capacity for growth. "Ongoing job gains are boosting wages and confidence". On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 per cent. Indicators of longer-term inflation expectations are little changed, on balance. Risks to the economic outlook appear roughly balanced. "Household spending has picked up while business fixed investment has continued to grow strongly". That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years. "I think it's more just, we are just looking at the economy and what does it need and how do we sustain the expansion, keep the labour market strong and try to keep inflation near 2 percent".

"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective".

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

(Copyright © 2015. All Rights Reserved.)
 
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