Fed raises interest rates and predicts faster pace of future increases

Stephen Stanley chief economist at Amherst Pierpont and Bob Browne Northern Trust CIO discuss the

In deciding to raise its outlook to four rate hikes this year, and staying with three increases for next year, Fed policymakers appeared to be a little more concerned about rising prices and guard against the risks of an inflationary surge.

They see another three rate increases next year, a pace unchanged from their projections in March.

Tighter monetary policy ought not to have a significant impact on the U.S. economy in the short term, but higher intermediate and long-term interest rates (a outcome of rising short-term interest rates) could dampen economic growth over time.

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%, citing solid economic expansion and job gains. The Fed had previously said its key rate "is likely to remain, for some time, below levels that are expected to prevail in the longer run".

Art Hogan, chief market strategist at Wunderlich Securities, described the Fed's decision as "moderately hawkish", but said it was not much different than expected.

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 Federal Reserve is widely expected to announce in a statement at 2 p.m. ET that it made a decision to raise interest rates.

Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation, but have said they would not change their policies or forecasts until those risks are realized.

The current economic expansion is the second-longest in US history, and will set a record if it lasts a bit more than a year longer. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly".

As widely anticipated, the Federal Reserve has raised its short-term federal fund rate - what banks charge each other- by 0.25 points to a range of 1.75 to 2 percent.

Fed Chairman Jerome Powell said at a news conference that the U.S. economy has strengthened considerably since the 2007-08 recession and is in "great shape". Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it.

As employers increasingly struggle to find workers - the jobless rate in May matched an 18-year low of 3.8 percent - wages could pick up from their middling pace of recent years. Finally, the median Fed funds rate for the end of 2020 was heldat 3.4%. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year. First, there is no precise means of measuring the level of the sustainable unemployment rate.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year. The Fed is raising rates gradually to keep the economy from overheating.

This means that despite the rise in U.S. yields, the spread/differential between USA and India's 10-year bonds has been maintained at around 4.5-5 percent, which is attractive.



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