Fed increases interest rates as inflation pressures loom
Third raise since financial crisis
Policymakers note ‘solid’ job gains
The US central bank has increased short-term interest rates for the third time since the financial crisis, stepping up the pace of tightening as policymakers grow ever more confident that the recovery will lift inflation.
The Federal Reserve raised the target range for the federal funds rate to 0.75 per cent to 1 per cent, in a move that has come earlier than markets had been expecting as recently as last month.
Treasury prices rallied, the dollar sank and US stocks extended early gains after the move as the Fed defied expectations in some quarters that it would signal a more aggressive rate rise path.
Policymakers stuck with median projections that there will be a total of three increases in rates this year. One rate-setter dissented from the vote for a rise, arguing in favour of unchanged rates.
Janet Yellen, the Fed chair, signalled in Chicago this month that the Federal Open Market Committee thought monetary policy had reached a turning point that would require rate rises to come more frequently than the once-a-year pace set in 2015 and 2016.
Among the factors underpinning the new confidence are employment and inflation approaching the Fed’s targets, a reduction in perceived risks overseas, and an ebullient mood in stock markets.
In its statement, the Fed signalled it was becoming more confident about inflation, noting that headline price growth had moved close to its 2 per cent objective, even if its favoured measure of core inflation remains lower.
Noting “solid” job gains, the statement also highlighted an improvement in business investment. The risks to the outlook remained “roughly balanced” it said, mirroring recent language.
However, the Fed has not ditched its cautious approach to monetary normalisation, with its post-meeting statement reiterating guidance that further rate increases will be gradual.
The “dot plot” projections pointed to a quicker pace of tightening than the once-a-year speed set over the past two years, but the Fed forecasts remain shy of predictions by some forecasters that there might be four increases this year.
The median interest-rate projection for the end of 2017 was centred at 1.375 per cent, unchanged from December’s outlook. The forecast was centred at 2.125 per cent in 2018, also the same as December’s prediction, and at 3 per cent in 2019, a shade higher than before.
Fed policymakers’ forecasts for growth and inflation remained little changed, with growth tipped to be 2.1 per cent this year and next year, slipping to 1.9 per cent in 2019. Core inflation is set to be 1.9 per cent in 2017 and 2 per cent in the two following years.
The possibility of looser fiscal policy has triggered speculation that the central bank will have to further accelerate its rate-rising, but a number of policymakers insist they want to see firmer plans from Congress before making a call on the impact of possible tax cuts.
Big Read |