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FOMC raises rates

US interest rates rose and economic forecasts were upgraded at the March meeting of the Federal Open Market Committee (FOMC). In a move that was widely anticipated by investors, policymakers voted unanimously to raise the key federal funds rate by 25 basis points to a target range of 1.5% to 1.75% and also indicated in their updated forecasts that they are prepared to implement additional rate increases next year.

  • Jerome Powell presided over his first meeting as Fed Chair
  • The Fed raised its forecasts for economic growth
  • The core rate of inflation is predicted to rise to 2.1% in 2019

US interest rates rose and economic forecasts were upgraded at the March meeting of the Federal Open Market Committee (FOMC). Jerome Powell presided over his first meeting as Federal Reserve (Fed) Chair, having taken over from Janet Yellen in February. In a move that was widely anticipated by investors, policymakers voted unanimously to raise the key federal funds rate by 25 basis points to a target range of 1.5% to 1.75%. 

“The FOMC appears to have become more sanguine about economic prospects”

The FOMC appears to have become more sanguine about economic prospects. Although growth in the rates of household spending and business investment has “moderated” during the first quarter of 2018, Chair Powell noted that the fundamentals underpinning demand remain “solid”. In the press conference following the announcement, Chair Powell said: “The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC’s 2% longer-run goal”. The Fed raised its forecast for US economic growth from 2.5% to 2.7% in 2018, and from 2.1% to 2.4% in 2019. Meanwhile, the rate of unemployment is predicted to fall from its current level of 4.1% to 3.6% in 2019. 

The core rate of inflation remains below the Fed’s 2% target; however, tax cuts and higher levels of federal expenditure have stoked speculation that inflationary pressures will start to build as prices and average earnings begin to rise. 

Policymakers expect the rate of inflation to “move up in coming months” before reaching its 2% target. The core rate of inflation is predicted to rise to 2.1% in 2019 and to remain around that level the following year. 

The FOMC also indicated in its updated forecasts that it is prepared to implement additional rate increases. Officials maintained their projection for interest rates at the end of 2018, but are building in another rate rise next year. Chair Powell said, “In the Committee’s view, further gradual increases in the federal funds rate will best promote (their) goals.  By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion.” Looking ahead, the median projection for the federal funds rate is 2.1% at the end of 2018, 2.9% at the end of 2019, and 3.4% at the end of 2020, although policymakers intend to adjust monetary policy if the outlook changes.

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