Federal Reserve Raises Key Interest Rate and Signals More Increases May Come

Ivan Schwartz
June 14, 2018

"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", the Fed said in a statement.

The Fed also signaled that it will raise rates more this year than previously expected - four times rather than three.

The Federal Reserve on Wednesday raised interest rates 0.25 points as the bank aims to prevent a tight labor market from driving inflation to unsustainable levels.

Projections released after the Fed's two-day meeting in Washington show policymakers expect the U.S. economy will grow 2.8% this year, while unemployment falls to 3.6%. Earlier this year, the Fed's projections saw just three rate hikes.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said. This would leave rates between 3.25 percent and 3.5 percent by the end of 2020.

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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. The Fed is looking for interest rates to rise to 3.4% by 2020, unchanged from the previous forecast.

It's the second rate hike under Powell, a Republican appointed to lead the Fed by President TrumpDonald John TrumpWhat you need to know about Tuesday's elections Danny Tarkanian wins Nevada GOP congressional primary Laxalt, Sisolak to face off in Nevada governor's race MORE. In the United Kingdom, the Bank has stopped actively buying financial assets and interest rates are up a little from their lows. With higher interest rates, this means that real interest rates will push higher.

The committee sees further declines the unemployment.

In another slight change of language - something sure to catch the attention of Fed watchers - it said "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labour market conditions and inflation near the Committee's symmetric two per cent objective over the medium term". Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced".

"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". This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and global developments.

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