US Central Bank Lifts Rates Amid Stronger Inflation, Drops Crisis-Era Guidance

The Central Bank of the UAE increased its benchmark interest rates by 25 basis points following the US Federal Reserve’s rate hike on Wednesday. Ryan Carter  The National

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 per cent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signalled it would tolerate above-target inflation at least through 2020.

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".

In deciding to raise its outlook to four rate hikes this year, and staying with three increases for next year, Fed policymakers appeared to be a little more concerned about rising prices and guard against the risks of an inflationary surge.

The central bank did not make a special note of trade in its statement, but Fed Chairman Jerome Powell is expected to discuss the matter in a news conference Wednesday afternoon. In April, the closely-watched 10-year Treasury yield rose above the key level of 3% for the first time since 2014.

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The central bank's new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

Powell said the Fed would be anxious if inflation either persistently overshoots or undershoots the 2% target.

The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the United States central bank's shift from policies used to battle the 2007-2009 financial crisis and recession. Even if you don't count food and fuel, the increase in producer prices was 2.6 percent in the previous year. "The Fed is prepared to be quicker about pushing rates higher". "Most people who want to find jobs are finding them, and inflation and interest rates are low".

If the Fed doesn't lower it's longer-run unemployment rate, it opens a question: how does the Fed move joblessness from 3.5 percent in 2020 to 4.5 percent in the longer-run?

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The new interest rate guidance shows the Fed will continue to raise short-term rates after reaching a level Fed officials call neutral level, which is where rates neither stimulate nor slow the economy. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

Last year's tax cuts are boosting economic growth, Powell said, but weak wage growth remains "a bit of a mystery". The further increase announced by the US Federal Reserve on Wednesday is expected to drive the interest rates for mortgage loans even higher. USA crude inventories came in way under expectations with a drawdown of 4.1 million barrels when a shortage of 1.4 million was forecasted. While the national economy appears to be on solid ground for 2018, the Fed must now consider how growing global trade disputes could slow US growth.

The current economic expansion is the second-longest in US history, and will set a record if it lasts a bit more than a year longer.

Higher rates in India can derail economic growth, which still is not on strong footing and can be negative for the equity market.

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But he said: "It is now essential that government makes progress on our long-term customs and other border arrangements". The current proposal would see Britain applying the EU's external tariffs for a limited period beyond December 2020.

Tighter monetary policy ought not to have a significant impact on the U.S. economy in the short term, but higher intermediate and long-term interest rates (a outcome of rising short-term interest rates) could dampen economic growth over time.

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