US FOMC hikes federal funds target rate range by 25 bps

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As expected, the Federal Reserve raised its short-term interest rate target by 1/4 percent at the conclusion of its Federal Open Market Committee (FOMC) meeting on March 21, to a range of 1 1/2 to 1 3/4 percent.

In its first policy meeting under new Fed chief Jerome Powell, the US central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum. Levy says he expects Powell's remarks "to focus less than Yellen's on detailed labor market conditions. and more on overall economic performance, and the Fed's role in supporting sustained expansion".

The U.S. Federal Reserve on Wednesday raised the benchmark interest rate by 25 basis points and signaled two more rate hikes in 2018, citing "strengthened" economic outlook in recent months. The dollar has been stuck in a trading range as investors wait to see whether the Fed will forecast four rate increases this year, instead of the median three seen in December's quarterly forecast.

Further, the committee is anticipating the rate of inflation to top-out at 1.9% this year, then rise to 2% in 2019 and 2.1% in 2020. Most importantly, the Committee indicated there could be three if not four hikes this year and next and the rate at which the funds rate could top out at is also higher than previously projected.

It is generally true that higher rates favor savers while lower rates favor borrowers - but the Fed does not directly control the rates consumers get on their bank accounts and mortgages. His basic message was that the fiscal policies will continue to improve economic growth without an outsize increase in inflation.

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The Fed sees a total of three rate increases this year, three next year and two in 2020. Not only will more home construction lead to a slower pace of rate hikes, it will also lead to faster economic growth.

Analysts are divided on exactly how many increases will occur this year.

Yet, Powell told reporters that even with rising interest rates, the world's largest economy is "healthier than it has been since before the financial crisis". Therefore, inflation should move up closer to 2 percent (the medium term target) as the base effect fades away. Fed officials also increased their expectations for GDP growth in 2019 to 2.4% from 2.1% in December past year.

They now expect the jobless rate to decline to 3.6 percent from the current 4.1 percent, and stay there through the end of 2020. Unemployment was expected to dip to 3.9 percent this year and next before returning to 4 percent. Markets have been rattled in recent weeks by Trump's tariff plans and embrace of a potential trade war.

"We are trying to take the middle ground here", Powell stated, adding that there are no signs that the economy is on the cusp of accelerating inflation.