Published: Fri, June 15, 2018
Money | By Wilma Wheeler

Feds raise interest rates, meaning you'll pay more for credit

Feds raise interest rates, meaning you'll pay more for credit

The federal funds target rate, which is now between 1.75 and 2 percent, is the highest it's been in almost a decade, indicating that the nation's central bank has confidence the economy will continue to expand.

"In view of realized and expected labor market conditions and inflation, the Committee chose to raise the target range for the federal funds rate to 1-3/4 to 2 percent", read a portion of a Federal Open Market Committee statement released Wednesday afternoon.

The Fed's policy statement said that the "labour market has continued to strengthen" and added that economic activity "has been rising at a solid rate".

In addition to the rate hike, the Federal Reserve's dot plot, which signals the future path of interest rates, suggested that the central bank was planning 4 rate hikes this year, instead of the 3 rate hikes forecast earlier.

Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m., his second since taking the helm from Janet Yellen in February.

"3-month SIBOR crept up in May to near 10-year highs".

Policymakers also projected a slightly faster pace of rate increases in the coming months, with 2 additional hikes expected by the end of this year, compared to one previously.

Shrinking supply of the United States dollar in the market has led to the dollar gaining in strength, and as we know, a strong dollar feeds on itself.

The European Central Bank (ECB) will follow the lead from the U.S. Federal Reserve and is expected to tighten monetary policy. The Fed previously nudged rates up in March. Unemployment, now at an 18-year low of 3.8 per cent, would drop to 3.6 per cent by year's end and to 3.5 per cent in 2019 and 2020 - levels not seen in 49 years.

Phillip Securities Research said that it was maintaining Singapore Banking Sector at Accumulate as loans growth remains healthy.

The new interest rate guidance shows the Fed will continue to raise short-term rates after reaching a level Fed officials call neutral level, which is where rates neither stimulate nor slow the economy. The Fed anticipates that inflation will be 2.1% in 2019 and 2020, which is a little over its target rate of 2% through 2020, but is viewed as manageable.

The US rate rises, combined with a stronger US dollar, are now putting a squeeze on emerging market economies.

Interest rates are going up again as the economy gets hotter. In early March, the Fed chief told Senators that unemployment - then at 4.1 percent - was "at or near or even below most estimates of the natural rate of unemployment", adding that there was "no evidence that the economy's now overheating".

That is a welcome step-up from the roughly 2-percent growth averaged throughout the recovery, which was plagued by a series of crises overseas and uncertainties at home, delaying the Fed's tightening plans.

"In view of realised and expected labour market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 per cent".

All three central banks (and the Bank of England) aim for inflation of about 2%, but in Japan and the Eurozone prices are rising substantially more slowly.

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