Fed Raises Interest Rates for Second Time this Year


The Fed has raised rates seven times since late 2015 on the back of the economy's continuing expansion and solid job growth, rendering the language of its previous policy statements outdated. Unemployment, now at an 18-year low of 3.8 percent, would drop to 3.6 percent by year's end and to 3.5 percent in 2019 and 2020 - levels not seen in 49 years.

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". That's good news because it means the economy is largely moving on its own steam in the eyes of the Fed.

By the end of next year, policy moves above their longer-run estimate of a neutral interest rate, a condition some economists would say is restrictive.

Even so, raising rates too quickly could prevent vulnerable Americans and pockets of the country still struggling from reaping the benefits of a strong economy.

In a two-day meeting, the Federal Open Market Committee voted to lift the target range for the federal funds rate by 25 basis points to between 1.75% and 2%.

The decision to raise rates comes as the United States unemployment rate hovers at 3.8% - the lowest rate in almost two decades - and inflation, which lagged the Fed's 2% target for years, shows signs of starting to pick up. The Fed's new forecast showed inflation inching up only slightly over the next 2 1/2 years.

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"For the first time in many years, the Fed has nearly complete confidence about the outlook", said Michael Gapen, chief US economist at Barclays Capital Inc.in NY. Even amid concerns about U.S. trade policy, the Fed raised its forecast for gross-domestic-product growth this year to 2.8% from 2.7%.

That is a welcome step-up from the roughly 2-percent growth averaged throughout the recovery, which was plagued by a series of crises overseas and uncertainties at home, delaying the Fed's tightening plans.

The US has now added jobs every month for 92 consecutive months and wages, which have stagnated since the recession, have begun to rise moderately. Officials also said that "indicators of longer-term inflation expectations are little changed". Fed officials repeated their assessment that "risks to the economic outlook appear roughly balanced". "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly". Inflation for the next two years is expected to remain at 2.1%, unchanged from the previous forecast. "The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation".

On inflation, policy makers forecast a slight overshoot of their target starting in 2018 at 2.1 per cent, and running through 2019 and 2020, compared with a 2020 overshoot in March's projections.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent.