Fed announces US rate increase

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Jerome "Jay" PowellImage copyright AFP/Getty
Image caption Federal Reserve Chair Jerome “Jay” Powell

The US central bank has said it will raise its benchmark interest rate citing a strengthened economic outlook.

The Federal Reserve said it had decided to raise the rate by 0.25% to a target range of 1.5% to 1.75%.

It said it expects to increase rates twice more this year, and increased its estimate for rate hikes in 2019 from two to three.

The central bank also hinted at future rate increases in its projections for coming years.

The central bank is trying to balance low unemployment with the potential for higher inflation spurred in part by federal government spending and tax cuts.

In a statement the Fed said its economic outlook had strengthened, but it also noted that household spending and business investment appear to have “moderated” from the end of 2017.

So far the Fed has moved cautiously as it shifts the US away from the ultra-low rates put in place following the financial crisis.

But there are new faces on the Federal Open Markets Committee, which votes on interest rates, raising questions about whether policymakers will move more quickly.

Economic conditions have also shifted. The US economy grew at an annualised rate of more than 3% during some quarters last year, while the unemployment rate is hovering at 4.1% – the lowest since 2000.

Inflation has continued to lag the Fed’s 2% target rate, but analysts have said they expect wages and prices to increase this year.

A rise in the Fed’s benchmark federal funds rate typically leads to higher rates for consumers and businesses.

Savers benefit, but borrowing becomes more expensive, which can dampen activity in industries such as housing and car sales and raise costs for businesses that rely on debt.

What does the Fed expect?

The committee predicts that the US economy will grow by 2.7% this year, faster than the 2.5% predicted in December.

The projections released at the end of a two-day meeting in Washington also showed that officials are expect slightly higher interest rates in 2019 and 2020 than they did in December.

“This is clearly a firming up of the future trajectory of policy tightening,” said Fitch’s chief economist, Brian Coulton.

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