US Federal Reserve raises interest rates for first time in a year

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janet-yellen-dataThe Federal Reserve has raised a key interest rate in response to a solid US economy and expectations of higher inflation, and it foresees three rate hikes in 2017.

Key points:

  • The US Federal Reserve raises the interest rate from 0.5 per cent to 0.75 per cent
  • It is the first time in a year that the interest rate has been raised, and the second time since the GFC
  • Analysts predict a faster pace of increases in 2017 as the Trump Administration takes over

The Fed’s action will mean modestly higher rates on some loans.

The central bank announced after its latest policy meeting that it is increasing its benchmark rate by a modest quarter-point to a still-low range of 0.5 per cent to 0.75 per cent. 

The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.

The Fed’s move, only the second rate hike in the past decade, came on a unanimous 10-0 vote. 

It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 per cent.

Its new projection has the unemployment rate dipping to 4.5 per cent by the end of 2017 and remaining at that level in 2018.

The Fed foresees economic growth reaching 1.9 per cent this year, slightly above its forecast in September, and 2.1 per cent in 2017. The new prediction is slightly more optimistic than it projected in September.

The Fed kept its long-term estimate for economic growth at 1.8 per cent, far below the 4 per cent pace that President-elect Donald Trump has said he can achieve with his program of deregulation, tax cuts and increased spending on infrastructure.

The Fed’s estimate that it will raise rates three more times in 2017 is up from an estimate of two increases at the September meeting.

Its policy statement showed only modest changes in wording from the previous meeting. It said “economic activity has been expanding at a moderate pace since mid-year” helped along by solid job growth.

Mr Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.

Pick-up fuels hopes economy will keep rising ….continue, reading view video HERE

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…related: Can we expect as many as six rate hikes?