Fed Raises Interest Rates, Signals 2 More Hikes This Year

Mae Love
June 14, 2018

Fed officials had been split about whether to raise rates three times this year or four.

The federal funds rate now sits between 1.75% and 2%.

And a majority of policy makers said they now expect a total of four interest rate increases this year.

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly", the Fed wrote in its statement Wednesday announcing the interest rate hike.

According to CNBC, the Reserve released new data this week showing the GDP forecast rose to almost 3%, up from the previous predictions of 2.7%. And that means higher interest rates on plastic. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally reaching the Fed's 2 percent target level.

The Fed said its policy of further gradual rate increases will be "consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective". It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy.

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Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating. Inflation by the Fed's preferred gauge would hit its target of 2 per cent this year and edge up to 2.1 per cent over the next two years. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year.

The unemployment rate, now at an 18-year low of 3.8 percent, is expected to fall to 3.6 percent this year, compared to the 3.8 percent that the Fed projected in March.

The 3.8-percent jobless rate is close to the lowest level ever seen in the U.S. There are more job openings than workers seeking employment in the country for the first time in recorded history, and recent inflation data shows prices inching through the Fed's ideal threshold. While the national economy appears to be on solid ground for 2018, the Fed must now consider how growing worldwide trade disputes could slow US growth.

While many economists think the current expansion will exceed the 1990's streak, some worry about what might occur once the impact of the tax cuts begin to fade and the Fed's gradual rate hikes begin to curb growth.

At the end of March, the average interest rate charge on cards, according to the Fed, was 15.32%, an 18-year high. Canada, the European Union and Mexico have all pledged to retaliate with tariffs on USA imports, which some studies show could cost the US close to 200,000 jobs.

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