The Fed raises rates in the midst of higher inflation, abandons the orientation of the crisis era

WASHINGTON (Reuters) – The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the US central bank's change in policies used to combat the financial crisis and the recession of 2007-2009.

Federal Reserve Board Chairman Jerome Powell speaks at his press conference after the two-day Federal Open Market Committee (FOMC) meeting on interest rate policy in Washington, USA. UU., June 13, 2018. REUTERS / Yuri Gripas

By raising its benchmark loan rate to a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed lowered its promise to maintain rates low enough to stimulate the economy "for a while" and said it would tolerate inflation goal at least until 2020.

The Fed has raised rates seven times since the end of 2015 based on the continued expansion of the economy and the solid growth of employment, converting the language of their previous obsolete policy statements.

Inflation is also adjusting, with new projections by lawmakers on Wednesday indicating that it would remain above the central bank's 2 percent target, reaching 2.1 percent this year and staying there until 2020. [19659004] The authorities projected a slightly faster rate of increase in the coming months, with two additional hikes expected by the end of this year, compared to a previous one.

They see three other rate increases next year, a rate unchanged from their previous forecast.

"The labor market has continued to strengthen (…) economic activity has been growing at a solid pace," said the Federal Open Market Committee of the central bank in its unanimous statement after the end of a two-day meeting .

"Household spending has recovered, while fixed investment by companies has continued to grow strongly," the Fed said.

Federal Reserve Board President Jerome Powell speaks at his conference After the two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy in Washington, USA. UU., June 13, 2018. REUTERS / Yuri Gripas

NOS Treasury yields rose after the statement was published, while US equities traded marginally lower. The dollar .DXY reduced losses against a basket of currencies.

Federal Reserve Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT).

"The Fed's path of gradual rate hikes and slow sheet reduction (balance) seems well established at this point.The trajectory of inflation in the United States or the broader US economy would probably have to change materially to that the FOMC deviates from that path, "said Aaron Anderson, senior vice president of research at Fisher Investments.

The Fed's short-term policy rate, a reference for a number of other borrowing costs, is now roughly equal to the rate of inflation, an advance in the central bank's battle in recent years to return the monetary policy to a normal foot.

Although rates are now more or less positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual increases in rates probably guaranteed as a robust economy enters its tenth year consecutive growth

PHOTO OF THE FILE: The headquarters of the Federal Reserve in Washington September 16, 2015. REUTERS / Kevin Lamarque

The estimates of the longer-term interest rates remained unchanged and reached up to 3.4 percent. percent in 2020 before falling to 2.9 percent in the long run.


The Fed now expects gross domestic product to grow 2.8 percent this year, slightly higher than previously forecast, and falling to 2.4 percent next year, unchanged from the March projections of the legislators. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent expected in March.

The increase in the rate was in line with the expectations of investors and showed the confidence of the legislators in the growth prospects of the economy, the continuation of low unemployment and constant inflation. Investors had given a little more than a 91 percent chance of a rate hike on Wednesday, according to an badysis by CME Group.

The Fed said its policy of gradual rate increases will be "consistent with the sustained expansion of economic activity, strong labor market conditions and inflation close to the symmetric 2 percent target."

In a technical move, the bank also decided to set the interest rate that it pays banks for excess reserves, its main tool for moderating short-term interest rates, just below the upper level of its target range. The step was necessary, said the Fed, to ensure that the rates stay within the expected limits.

The policy statement shied away from discussing tensions over the Trump administration's trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.

Individual policy makers at the Fed have expressed concern about the economic risks of widespread tariff retaliation per eye, but have said they would not change their policies or forecasts until those risks are met.

Report of Howard Schneider; Editing by Paul Simao


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