June 18, 2018

Fed raises key rate and sees possible acceleration in hikes

13 June 2018, 11:27 | Melvin Schneider

If core consumer price inflation surprises on the upside this week Amazon may be one of the culprits

If core consumer price inflation surprises on the upside this week Amazon may be one of the culprits

The Fed's twin mandate is to bolster employment while controlling inflation, and in the current environment more rate rises appear inevitable. It's the second rate hike under Powell, a Republican appointed to lead the Fed by President TrumpDonald John TrumpWhat you need to know about Tuesday's elections Danny Tarkanian wins Nevada GOP congressional primary Laxalt, Sisolak to face off in Nevada governor's race MORE.

Federal Reserve Chairman Jerome Powell announced Wednesday that as from January 2019, he will hold press conferences after every policy meeting.

"The main takeaway is that the economy is doing well", he said. 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. While a few said the curve had become "a less reliable signal" of future activity, several stressed the link between inversions and coming economic downturns.

The Fed stopped that in 2014 and has made a start on reducing its holdings of trillions of dollars' worth of assets.

Even so, raising rates too quickly could prevent vulnerable Americans and pockets of the country still struggling from reaping the benefits of a strong economy. At this point, there's been little evidence that wage or price inflation is accelerating.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

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The British position has however been complicated by the referendum on membership of the European Union and a spike in inflation that followed the decline in the pound after the vote.

Fed officials expect to raise interest rates at least once more in 2018 and had been split on a possible fourth hike in their last meeting.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

The rate increase was in line with investors' expectations and showed policymakers' confidence in the economy's growth prospects, continued low unemployment and steady inflation.

However, that was only by a slim margin with many individual FOMC members indicating that rates should increase four times this year. Interest rates on new fixed-rate mortgages could also climb.

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