Federal Reserve bumps up U.S. interest rate, signals two more in 2018

Federal Reserve bumps up U.S. interest rate, signals two more in 2018

(Kitco News) - Gold prices are holding steady just below the psychological barrier of $1,300 an ounce after the Federal Reserve suggested that it will hike interest rates more aggressively this year and the next as the US economy continues to grow.

Fed officials also said they expect to raise rates twice more this year, faster than previously forecast. The action means consumers and businesses will face higher loan rates over time.

But for now, the Atlanta Fed estimates the USA economy is roaring at a 4.6 percent rate, a level it reached only twice since the recession.

The federal government drastically upgraded its forecasted 2018 economic outlook Wednesday, saying the U.S. economy was rising at a "solid" rate; an increase from its previous prediction of "moderate" growth.

In a notable change to its statement, the Fed removed language indicating that it expected the economy to grow at a pace warranting "gradual" rate increases. The US 10-year rate slipped from 3.00% to 2.98% after that breaking news. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year. "Powell seems comfortable exploring the lower reaches of the unemployment rate given few indications it is resulting in stronger inflation pressures".

The new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast. The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

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On inflation, policy makers forecast a slight overshoot of their target starting in 2018 at 2.1 per cent, and running through 2019 and 2020, compared with a 2020 overshoot in March's projections.

Government data show that hourly earnings are rising at an annualized rate of 2.8 percent, and even a touch more for lower-income workers. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year. Wednesday's statement said the economy is "rising at a solid rate".

The central bank will debate whether to end its huge asset purchases by year-end, which was a crisis-era stimulus credited with pulling the euro zone economy out of recession.

The unemployment rate has "declined", as opposed to "stayed low".

After keeping interest rates low for years to boost growth, the central bank is now moving rates back to what economists say is a neutral position-one that neither boosts growth nor depresses it. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

Trump's imposition of tariffs on steel and aluminum imports has enraged US allies. The Fed's so-called Beige Book, an anecdotal account of business and economic conditions, reported that tariffs and the threat of a trade war with China have begun to affect capital projects and disrupt supply chains.

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