Fed hikes key rates by 25 bps, projects another three increase in 2017

The US Federal Reserve on Thursday raised the benchmark interest rate by a quarter percentage point as expected, citing an improving economy with one month to go before President-elect Donald Trump takes office.

The policy-setting Federal Open Market Committee voted unanimously to increase the key federal funds rate to a range of 0.5 to 0.75 per cent, but repeated that it expects the world’s biggest economy will require only “gradual” increases going forward.

The rate increase from the previous range of 0.25 to 0.5 per cent is the first hike since December 2015 and only the second in a decade.

Observers will listen closely to Fed chair Janet Yellen’s press conference following the announcement for clues on how fast the pace of rate increases might be next year.

Read More: Fed hikes key rates by 25 bps, projects another three increase in 2017

Many analysts expect the central bank will have to raise rates faster if Trump’s promised infrastructure spending and tax cuts fuels faster inflation.

The FOMC statement noted that inflation indicators “still are low” relative to the central bank’s 2.0 per cent target.

“In light of the current shortfall of inflation from two per cent, the Committee will carefully monitor actual and expected progress toward its inflation goal,” it said.

In their economic projections, Fed officials project three rate increases in 2017, putting the rate at 1.4 per cent at the end of the year. It would then rise at the close of 2018 to 2.1 per cent.

Of the 17 officials making predictions, 11 see rates of 1.375 per cent or higher next year.

They project inflation will not hit the 2.0 percent target until 2018, falling just shy of the mark next year.

The other key data focus for Fed policy, unemployment, is forecast to remain steady at around 4.5 per cent through 2019, from 4.6 per cent currently.

The committee has been divided this year about the timing of this second rate increase, with some worried about the potential threat of inflation if the Fed failed to act.

But the majority view had been that there was a greater risk of jeopardizing the fragile US recovery by moving too soon, especially amid global uncertainties including the slowing of China’s economy and Britain’s vote to leave the European Union.

In addition, signs of inflation or wage pressures were absent from the economic data. But the FOMC notes that inflation has been kept low in part due to the decline in energy prices, which could prove to be temporary.

On the broader economy, the committee said growth has continued at a “moderate pace” since mid-year, accompanied by moderate increases in household spending, while the labor market “has continued to strengthen.”