Economy

Fed raises interest rates, says two more hikes likely in 2018

Fed raises interest rates, says two more hikes likely in 2018”

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

The rate move was not a surprise in any sense of the word, given that Fed funds futures were pricing in a 100% chance of a 25-bps hike today; as has become the expectation, the Fed changed its policy when it had a new Summary of Economic Projections in hand.

The Fed expects inflation to overshoot its target faster than it previously thought, prompting it to raise its forecast for rate hikes this year. But that exorbitant rate is likely to go up to 15.57% within two billing cycles, CompareCards says, as lenders pass along the higher rates to clients.

But, he added, "We really don't see it in the numbers". The Fed is raising rates gradually to keep the economy in check.

There's only two ways to limit the hit from higher borrowing costs: Pay off all your credit cards in full each month or spend less on your cards so you won't get penalized as much for purchases bought with money you don't have.

Trump has slapped tariffs on steel and aluminum imports, has threatened additional tariffs on Chinese imports and has directed his administration to consider further duties on imported cars.

The already historically low unemployment is projected to fall even further, ending the year at 3.6 per cent before settling at 3.5 per cent in 2019 and 2020.

"Economic activity has been rising at a solid rate", the FOMC said in its statement. This would leave rates between 3.25 percent and 3.5 percent by the end of 2020.

USA companies are hiring at a rapid pace and consumer and business spending remains healthy, the Fed noted, and core inflation is finally expected to hit the central bank's target of 2 per cent this year.

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point". Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late a year ago. Fed officials had been split about whether to raise rates three times this year or four.

Fed officials have begun to debate publicly how close the economy is to overheating. When the Fed tightens credit, it aims to do so without derailing the economy.

The current economic expansion is the second-longest in USA history, and will set a record if it lasts a bit more than a year longer.

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on USA imports, which some studies show could cost the US close to 200,000 jobs.



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