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Fed Raises Key Rate, Foresees 2 More Hikes This Year

22 March 2018

Newly-installed Fed Chairman Jerome Powell presided over his first meeting, which raised the federal funds rate to 1.5-1.75 percent. "The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong". On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent.

The Dow Jones Industrial Average fell 28.09 points, or 0.11 percent, to 24,699.18, the S&P 500 lost 3.47 points, or 0.13 percent, to 2,713.47 and the Nasdaq Composite dropped 7.34 points, or 0.1 percent, to 7,356.96.

Fed Governor Lael Brainard, who has advocated slower rate hikes, has more recently expressed optimism about the trajectory of the economy.

Central bankers see growth picking up this year and next, with GDP gaining 2.7 percent in 2018 and 2.4 percent in 2019.

The Fed has raised the benchmark federal funds rate five times in quarter-point steps since December 2015. That's up from an earlier forecast of two, amid expectations of faster economic growth that they forecast will push the unemployment rate to its lowest level in a half-century. By a slim margin, officials said they expect an additional rate increase to come in 2019, for a total of three increases that year.

The Fed said it would raise its benchmark interest rate to a range of 1.5 percent to 1.75 percent, marking the sixth time since the financial crisis that it has raised rates and the highest rate since 2008. "That's why we are seeing a bit of a disappointment on the dollar side", said Minh Trang, senior foreign currency trader at Silicon Valley Bank in Santa Clara, California.

In a statement ending its latest policy meeting, the Fed boosted its key short-term rate Wednesday by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent. Markets are pricing in three rate increases this year, but some worry policymakers might squeeze in a fourth, triggering a bond and equity selloff.

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The average rate on a five-year Treasury-indexed adjustable-rate mortgages is now about 3.67 percent, according to Freddie Mac. Fed officials project 2-percent GDP growth In 2020.

Policy makers also maintained their inflation outlook of 1.9%, slightly below the Fed's target.

"Many of the forces that acted as headwinds to United States growth and weighed on policy in previous years are generating tailwinds now", she said earlier this month in a speech pointing to the recent fiscal stimulus from tax cuts and higher spending.

Mark Nash, the head of fixed income at Old Mutual Global Investors said: "A relaxed Fed will support easy financial conditions, risk appetite and may hurt the U.S. dollar in the near term".

Investors are cautious as they await the outcome of the U.S. Federal Reserve's first meeting under its new chairman, Jerome Powell, and his subsequent news conference.

Powell then commented on the strength of the economy and projections for future rate increases as inflation remains below the Fed's target of 2% despite a host of strengthening signs in the labor market.

Fed Raises Key Rate, Foresees 2 More Hikes This Year