On Wednesday, the U.S. Federal Reserve raised interest rates and it forecast two more hikes for this year. The Fed highlighted that increased government spending and federal tax cuts will boost economic growth and inflation. In the first policy meeting under the new chairman Jerome Powell, the U.S. central bank said that inflation should now move higher than its 2 percent target.
In a statement released after the two-day long policy meeting, the Federal Reserve said that the economic outlook has strengthened in recent months. That’s why the central bank saw it fit to lift its benchmark lending rate by 0.25 percent. Fed Chief Jerome Powell said that the central bank will remain on course towards gradual rate increases while being on guard against inflation. The rate hike, however, didn’t come as a surprise. Reuters polled 104 economists who all said the Federal Reserve would raise the rates.
The policy statement also had an effect on the markets. The U.S. stocks rose immediately after the policy statement although the momentum was not maintained. Eventually, the markets closed in the red later in the day. U.S. Treasury yields also fell and then recovered. The dollar recorded its biggest single-day loss in two months against a basket of major global currencies.
The latest interest rates hike is seen as a step away from economic stimulation done since the 2007-2009 recession. There was speculation among Fed officials that an anticipated stimulus plan by the Trump administration of $1.8 trillion and hints of price and wage pressures could pull Americans toward an already tight labor market.
There were also fears that rapid gains in the economy could push up inflation way beyond the Fed target. In these conditions, policymakers at the central bank were split as to whether three or four hike rates were needed this year. However, policymakers were clear that it’s very likely that there will be at least three rate hikes next year and two more in 2020.
The decision is the clearest indication that the Federal Reserve is confident in the economy and the outlook so far. Policymakers at the bank estimate that the U.S. economy will grow by 2.7 percent in 2018, an increase from the initial 2.5 percent forecast released in December last year. The unemployment rate is also expected to drop down to 3.8 percent by the end of the year from the 4.1% recorded last month. However, recent data on retail spending and home sales have remained relatively weak. There is confidence though that this will not have any significant impact on the economy.
Jerome Powell took over from former Fed chair Janet Yellen a few weeks ago. Although Powell had said before that he would continue with the same policy guidelines set in place by Yellen, the new Fed chair could face new outside economic risks including a possible trade war escalation between the U.S. and other major countries. Powell recognized this potential risk in his first briefing as chairman adding that the trade tension has not affected the central bank’s outlook for the economy.