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Federal Reserve raises rates amid stronger economy

15 June 2018

Announcing the decision to increase its target for the fed-funds rate to a range of 1.75% to 2%, the Fed described the United States jobs market as "strong" and said economic activity had been rising at "a solid rate".

The central bank raised the federal funds rate to a 1.75-2 percent target range, the second increase under Fed Chairman Jerome Powell.

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

At a news conference, Powell sought to portray the Fed's actions as evidence mainly that the economy is doing well and not that the central bank is eager to accelerate its rate increases.

Second, the lower unemployment over the past couple of months has been accompanied by a drop in the labor force participation rate for 25-54 year olds - the prime working-age group unaffected by the aging of the USA population.

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"In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 per cent inflation objective".

The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers' March projections.

"The fact that we live in that uncertainty is why we've been gradually raising rates", Powell said Wednesday.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank's 2 per cent target, hitting 2.1 percent this year and remaining there through 2020. "This is a rare occurrence where the chairperson can help influence and shape the overall dot plot message", Ruskin, the global head of G10 FX strategy, said in a preview. "So the dollar would benefit if the Fed actually signals readiness to hike four times this year", said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. For 2020, the Fed foresees a median rate of 3.4 per cent.

Even after Wednesday's hike, the real rates in U.S. are still negative. The Fed expects unemployment to fall to 3.6% this year, and, said Powell, "Most people who want to find jobs are finding them".

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There are rising concerns about trade more generally and the potential risks to the economic outlook.

The US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens.

Last year, the BIS estimated the proportion of zombies among listed companies in 14 OECD economies had doubled, to 10 per cent, since the crisis. Hence, we can see the U.S. 10-year yield to enter uncharted territory above 3 percent in medium term.

The Fed has partially attributed sluggish wage growth to low productivity, or value added per hour on the job, and suggests the situation could stabilize with continued economic growth.

USA central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 per cent" would help anchor long-run inflation expectations around the target.

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Federal Reserve raises rates amid stronger economy