US interest rate raised amid solid growth and increasing inflation

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The Federal Reserve has raised its benchmark interest rate for the second time this year and signalled it may step up its pace of rate increases because of solid US economic growth and rising inflation.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

The central bank raised its key short-term rate on Wednesday by a modest quarter-point to a range of 1.75% to 2%.

The move reflects the economy’s resilience, the job market’s strength and inflation that is finally nearing the Fed’s target level. The action means consumers and businesses will face higher loan rates over time.

It was the Fed’s seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.

The Fed announcement helped resolved a debate in financial markets over whether the Fed under Jerome Powell, who succeeded Janet Yellen as chairman in February, might see a need to signal a possible acceleration in rate hikes.

Financial Markets Wall Street Federal Reserve
Trader Peter Tuchman watches screens on the floor of the New York Stock Exchange after the rate decision (Richard Drew/AP)

Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period.

The Fed had said its key rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run”.

The Fed’s new projection for the pace of rate hikes shows four this year and three in 2019 — both unchanged from its previous forecast in March — and one in 2020, down from the two that had been projected previously.

The new median forecast projects the Fed’s benchmark rate at 3.1% by the end of 2019, up from 2.9% in the previous forecast.

For 2020, the Fed foresees a median rate of 3.4%. That means that by then, it thinks its key rate will finally exceed the 2.9% it sees as neutral — as neither stimulating nor restraining growth. Should the Fed’s expectations prove accurate, its rate policy would then be intended to slow the economy.

In its updated forecasts, the Fed envisions stronger growth this year, with the economy expanding 2.8%, up from the 2.7% it predicted in March.

Unemployment, now at an 18-year low of 3.8%, would drop to 3.6% by year’s end and to 3.5% in 2019 and 2020 — levels not seen in 49 years. Inflation by the Fed’s preferred gauge would hit its target of 2% this year and edge up to 2.1% over the next two years.

A gradual rise in inflation is coinciding with newfound economic strength.

After years in which the economy expanded at roughly 2% annually, growth could top 3% this year. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late last year.

With employers hiring at a solid pace month after month, unemployment has reached 3.8%. Not since 1969 has the jobless rate been lower.

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