Federal Reserve hikes benchmark interest rate

WASHINGTON: The US Federal Reserve raised interest rates by a quarter point and signalled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.
The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 per cent and 0.75 per cent.
US bond yields moved higher and the dollar rose against a basket of currencies after the Fed’s unanimous policy decision. US stocks were trading marginally lower, but selling picked up speed during Fed Chair Janet Yellen’s subsequent news conference.
Yellen indicated the central bank was, at the margins, adapting to Trump as “some of the participants” on the rate-setting Federal Open Market Committee began shifting fiscal policy assumptions.
“We are operating under a cloud of uncertainty… All the FOMC participants recognize that there is considerable uncertainty about how economic policy may change and what effect they may have on the economy.”
Partly as a result of the anticipated changes, the Fed sees three rate hikes in 2017 instead of the two foreseen in September. Yellen called that a “very modest adjustment” driven by strong job gains, evidence of faster inflation, and the expected impact of Trump’s policies.
But she also said Wednesday’s rate increase should be “understood as a reflection of the confidence we have in the progress the economy has made.
In addition to its policy statement, the Fed issued fresh economic forecasts that indicated the current once-a-year pace of rate increases will accelerate next year. Markets and the Fed appeared to be close on their rate outlooks, with Fed futures markets pricing in at least two and possibly three hikes in 2017, up from one to two prior to this week’s meeting.
With President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed’s 2 per cent target.
The Fed’s projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run “normal” 3.0 per cent. That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.
“They didn’t mention the fiscal stimulus but typically their aggressiveness does indicate that there’s a little more confidence that they can get away with three hikes next year,” said Aaron Kohli, interest rate strategist at BMO Capital Markets. — Reuters

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