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FOMC raises rates at their June meeting

US Federal Reserve (Fed) policymakers raised interest rates for the second time this year, increasing the key federal funds rate by 0.25 percentage points to a range of 1.75% to 2%. The decision was widely expected and the Federal Open Market Committee (FOMC) is expected to implement another two increases this year and a further three next year.

  • The US economy is tipped to expand by 2.8% this year
  • The labour market is expected to tighten further
  • The tone of the FOMC’s statement shifted 

“Fed Chair Jerome Powell: “The main takeaway is that the economy is doing very well””

US Federal Reserve (Fed) policymakers raised interest rates for the second time this year, increasing the key federal funds rate by 0.25 percentage points to a range of 1.75% to 2%. The decision was widely expected and the Federal Open Market Committee (FOMC) is expected to implement another two increases this year and a further three next year.

Fed officials gave an upbeat assessment of the economic outlook, citing improving growth and a strengthening labour market. The US economy expanded by 2.5% in 2017, and the Fed expects it to grow by 2.8% in 2018. In comparison, the International Monetary Fund (IMF) and the Organisation for Economic Co-operation & Development (OECD) both predict growth of 2.9% in 2018. Fed Chair Jerome Powell said: “The main takeaway is that the economy is doing very well”.

The rate of unemployment fell to 3.8% in May, representing its lowest level since April 2000. Unemployment is predicted to continue its decline to reach 3.5% in 2019 and remain there in 2020. Core inflation is forecast to reach a median level of 2.1% next year and to remain there over 2020. 

The Fed’s statement also signified a change in the tone of policymakers, who omitted previous wording stating that rates will remain “below levels expected to prevail in the longer run”. Looking ahead, this shift in tone changes the prevailing question surrounding US interest rate policy from “when?” to “how high?”

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