Markets

Wall Street sees two more Fed hikes in 2018, three in 2019

Wall Street sees two more Fed hikes in 2018, three in 2019

Wednesday's decision - the sixth quarter-point increase in 18 months, raising the benchmark federal funds target rate to a range of 1.75 per cent to 2 per cent - was a unanimous 8-0.

The 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.

And a majority of policy makers said they now expect a total of four interest rate increases this year. It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020.

"The main takeaway is that the economy is doing very well", Fed Chairman Jerome Powell said at a news conference.

The Fed now envisions stronger growth this year - 2.8 percent, up from the 2.7 percent it predicted in March.

Yields rose after Fed officials raised their estimates for the pace of growth and inflation this year while also lowering their estimate for the unemployment rate.

"Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly", the Fed wrote in its statement on Wednesday announcing the interest rate hike. The Fed is raising rates gradually to keep the economy in check.

US Federal Reserve raises interest rates
The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level. All those countries have vowed to retaliate against any USA tariffs with their own penalties against US goods.

United States interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher.

To be sure, the Fed is not inclined to hike rates any more than gradually after years of mostly over-optimistic predictions for inflation and economic growth, and disappointing wage gains of around 2.5 percent annually.

Opinion was more divided about 2019's increases, however, although the median outcome was in line with the Fed's own forecasts for three hikes. He'll likely address the decision to hike rates and the Fed's views on the overall economic outlook. When the Fed tightens credit, it aims to do so without derailing the economy.

Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond". But if it miscalculates and overdoes the credit tightening, it can trigger a recession.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

While many economists worry about a trade war harming growth, the Fed did not mention trade concerns in its statement.

The Fed's meeting this week is to be followed by policy meetings of two other major central banks - the European Central Bank on Thursday and the Bank of Japan on Friday.