Federal Reserve raises U.S. interest rates again

US Federal Reserve raises key interest rate

It is the seventh time the bank has raised rates since 2015.

The Federal Reserve raised interest rates for the second time this year, taking the range of its Federal Funds Rate from 1.75pc to 2pc, up by 0.25 percentage points.

While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher.

The FOMC statement stressed that rising interest rates were unlikely to derail economic growth - which the committee now characterises as "strong" rather than "moderate" - and again made clear the Fed had some tolerance for inflation above its 2 per cent target.

US growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months.

And a majority of policy makers said they now expect a total of four interest rate increases this year. It would also allow the Fed to be less choreographed and more spontaneous in cutting or raising rates as economic conditions warrant. "The trajectory of United States inflation or the broader USA economy would likely need to change materially for the FOMC to deviate from that path", said Aaron Anderson, senior vice president of research at Fisher Investments. The dollar pared some losses but was still trading lower against a basket of currencies. Ahead of the announcement, markets were pricing in a almost 100% chance of a rate hike. The Fed chief now holds four such events each year. Fed officials project their preferred gauge of inflation hitting 2.1 percent in the fourth quarter of this year, compared to 2019 in the March forecast. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

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Here's the Fed's full statement: "Information received since the Federal Open Market Committee met in May indicates that the labour market has continued to strengthen and that economic activity has been rising at a solid rate".

Negative for gold though is that the central bank also forecasts tame inflation pressures throughout year. The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level.

Fed policy makers now see USA unemployment at 3.6 per cent in the fourth quarter, followed by 3.5 per cent in 2019 and 2020, based on median projections.

Treasury yields rose following the rate announcement.

The Fed said its policy of further gradual rate increases will be "consistent with a sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2% objective". Rates for vehicle loans and variable-rate mortgages are also likely to increase.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond".

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