Published: Thu, March 22, 2018
Money | By Wilma Wheeler

Fed hikes interest rates and predicts jobless rate to continue to fall

Fed hikes interest rates and predicts jobless rate to continue to fall

Interest rate options traded with lower implied volatility, suggesting that the Powell Fed achieved exactly what it wanted to: it stabilized market expectations while sounding upbeat about growth and ready to raise rates if necessary.

Most people will see at least a minor impact on their credit card statements in the next few billing cycles, while those with adjustable-rate mortgages, home equity lines of credit, auto loans and other loans with variable rates of interest will be hit hardest.

The Fed hiked its key interest rate on Wednesday, surprising no one, while signaling no rush to step up its gradual pace of monetary tightening.

The Federal Reserve has voted to raise USA interest rates by 25bps in Jerome Powell's first meeting as chairman since taking over from Janet Yellen.

Officials in December penciled in three rate increases this year, but recently some have said four moves would be appropriate as the economy strengthens. More aggressive rate increases would likely slow the economy and make stocks less appealing. But it did boost its 2019 estimate from two hikes to three.

There were no dissents to the decision to lift interest rates.

Powell's job is to keep the economy churning without starting a recession during his four-year term - a risk the Fed chair has said he does not see as imminent.

Powell will have the opportunity to comment - or not - on fiscal policy in his first press conference as chairman, due to begin at 2:30 p.m. (1830 GMT).

United States indexes lifted following the announcement, with the Dow Jones rising as much as one per cent.

The data was eventually revised lower. Still, she said, "We will need to be vigilant" because a booming economy can lead to a relaxation in lending standards.

Investors probably shouldn't be too reassured by a largely status-quo announcement on 2018 policy from the Fed. They raised their estimate for growth in 2019 to 2.4 percent, up from 2.1 percent. Early estimates of growth in the first quarter of 2018 point to a deceleration to 1.8 per cent from the 2.5 per cent annualised pace reported for the final quarter of 2017. It marked the sixth time the Federal Open Market Committee has raised rates since 2015.

The Fed has been raising rates slowly since 2015, moving the U.S. away from the ultra-low levels put in place following the financial crisis. The Fed's forecasts for 2018 projected an annualised expansion of 2.7 per cent, compared with 2.5 per cent in its December outlook, and 2.4 per cent next year compared with 2.1 per cent previously. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance. The economic outlook has strengthened in recent months.

The Fed's preferred gauge of inflation stands at 1.5 percent.

In its first policy meeting under new Fed chief Jerome Powell, the USA central bank said inflation should move higher amid a stronger economy after years below its 2 percent target.

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