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Fed raises rates on Powell's debut, ups GDP forecast

07 April 2018

On Wednesday, the U.S. Federal Reserve expectedly raised interest rates for the first time this year, also the first rate hike under new chief Jerome Powell. Levy says he expects Powell's remarks "to focus less than Yellen's on detailed labor market conditions. and more on overall economic performance, and the Fed's role in supporting sustained expansion". Two more quarter-point rate increases are expected for the rest of this year, easing worries that one additional hike might be in the cards. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.

The move opens up the range of interest rates paid by major central Banks: ECB 0%; Bank of England 0.5%; Bank of Japan -0.1%; Bank of Canada 1.25%; Reserve Bank of Australia 1.5%.

More so given recent reports that Trump would announce an increase in tariffs on Chinese imports this week and that China is already considering slapping higher tariffs on USA agricultural exports. The estimate for 2019 was increased from 2.1% to 2.4%. Wednesday's rate change is the sixth since 2015.

"Job gains have been strong in recent months, and the unemployment rate has remained low", the FOMC said.

Although the anticipated Fed hikes are expected to have a muted impact on fixed-rate mortgages, other loan products, including home equity lines of credit and adjustable-rate mortgages, could see significant rate increases.

The Fed now expects economic growth to accelerate faster this year to 2.7 percent. The 2020 gross domestic product growth median projection was also unchanged at 2%. This - plus the Fed's upwardly revised economic projections - raises the possibility of a fourth hike in 2018.

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The midpoint of the Fed's target range will now reach 3.4 per cent by 2020, higher than the 3.1 per cent predicted previously and above the United States central bank's 2.9 per cent estimate of the neutral rate that neither restrains growth nor pushes it forward.

'This may indicate that the Fed believes there is more slack in the economy as the unemployment rate shows and/or the structural deflation forces, including demographics and technology destruction, remain in place, ' he added.

Lael Brainard, a Fed governor who has been less hawkish than many of her colleagues, said in a speech this month that in many ways, "today is the mirror image of the environment we confronted a couple of years ago".

Moreover, with President Donald Trump's announcement of tariffs of 25% and 10% on steel and aluminium, trade war threats are looming and may further impinge on the way foreign investors allocate funds for emerging developing economies.

"At the same time, we want to avoid inflation running persistently below our objective, which could leave us with less scope to counter an economic downturn in the future".

Fed raises rates on Powell's debut, ups GDP forecast