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Fed Lifts Rates by 25 bps, Maintains FY18 Policy Outlook

The US Federal Open Market Committee (FOMC) meeting took place on Tuesday and Wednesday to set monetary policy. At the end of the meeting, the Federal Reserve released its policy statement, revised economic forecasts and “dot plot” projections of future benchmark rate hikes.

Further, the Fed Chairwoman Janet Yellen held the customary press conference at 2.30 pm Eastern time.

As anticipated the US Federal Reserve raised the benchmark interest rates by 25 basis points to a range of 1.25% to 1.5%.

Two Fed Presidents, Charles Evans of Chicago and Neel Kashkari of Minneapolis, voted against the rate hikes. The rate will have an impact on credit cards and variable-rate mortgages. It is the third quarter point move in 2017. The Fed’s aim to hike rates thrice next year remains unchanged. However, the central bank now expects only two hikes in 2019.

Notably, the FOMC raised their GDP growth estimates for next year to 2.5%, from 2.1% issued in September. The upward revision comes after two consecutive quarters of at least 3% growth. The US economy is also expected to expand at an annualized rate of 3% in the final quarter of this year. However, Fed expects growth to scale back to 2.1% in 2019 and 2% in 2020. Still, the projected growth is higher than the respective 2% and 1.8% forecasts made three months earlier.

The unemployment rate was slashed to 3.9% in 2018 and 2019. In 2020, the unemployment rate is expected to be 4%, down from 4.2% forecast earlier. Long-term unemployment rate forecast was left unchanged at 4.6%. The current unemployment rate in the US is 4.1%.

For 2018, the inflation rate forecast was upwardly revised to 1.7%, from the prior outlook of 1.6%. However, the Fed cautioned the inflation rate might not hit the targeted 2% level until 2019. The US dollar is not expected to remain range bound against its major rivals as the rate hike was already priced in.

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The US inflation is well below the Fed’s target level of 2%. Still, the Fed officials went ahead to hike rates, because the central bank wants moderately tighter financial conditions. By raising the yield curve, the Fed hopes to create a little restraint on growth and ensure steady economic expansion without overheating.

However, the two rate hikes implemented so far have failed to yield the desired results. That can be clearly seen from the routine record highs made by the stock market.Additionally, the 10-year Treasury yield remains virtually unchanged so far.

The rate hike is not a surprise as the New York Fed President William Dudley has repeatedly warned the Fed would raise benchmark interest rates frequently if financial conditions do not tighten as expected.

In its policy statement, the Fed has projected three rate hikes in 2018. Some analysts believe the tax reform would even result in four hikes next year. However, the Fed may not provide such a hint until Jerome Powell gets the nod from the Senate as the next chairman.

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