Fed Raises Rates, Hints Towards More
The U.S. Federal Reserve raised its benchmark short-term interest rate on Wednesday for the second time this year and hinted that two more rate hikes could be forthcoming. The hike pushed the interest rate target to 1.75 percent to 2 percent. The post-meeting statement issued was notably short, but it did change key language from the last statement in a way that alluded to the Fed’s more optimistic view on economic growth and its higher inflation predictions.
Specifically, the statement used the word “symmetric” twice with regards to the 2 percent inflation target, a language that analysts believe hints towards a tendency to let price pressures evolve slightly before attempting to wheel in growth. Fed committee members hinted that they expect core inflation to reach their 2 percent target by the end of the year and that economic growth could hit 2.8 percent. Committee members also reduced forecasts for unemployment, now predicting a 3.6 percent unemployment rate by the end of 2018, down from the 3.8 percent that was forecasted in March.
“The labor market has continued to strengthen ... economic activity has been rising at a solid rate,” the Fed said in its statement. “Household spending has picked up while business fixed investment has continued to grow strongly.”
The committee also indicated its expectation for three additional rate hikes in 2019, notwithstanding the fourth hike that is expected later this year. The Fed’s short-term policy r is now just about equal to the inflation rate, a notable measure in the Fed’s recent struggle to bring monetary policy back to normal. Still, the Fed described its current policy as “accommodative” as the U.S. economy begins its tenth consecutive year of expansion.
Asian shares fell on Thursday in response to the Fed’s hawkish tone and weak Chinese data. Japan’s Nikkei 225 was down 0.64 percent as of 1:39 p.m. HK/SIN, and Hong Kong’s Hang Seng Index was down 0.73 percent. South Korea’s Kospi suffered the worst losses, dropping 1.25 percent by the early afternoon. The Shanghai Composite and that ASX 200 were both down slightly over 0.10 percent.