US Federal Reserve lifts rates amid stronger inflation

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The Fed aims to achieve its mandates of maximizing employment and stabilizing prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat.

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%, citing solid economic expansion and job gains. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative", with gradual rate increases likely warranted as the economy enters a 10th straight year of growth.

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.

So-called core inflation - which excludes volatile items like energy and housing - is now 2.2 percent, around the level the Fed is looking for.

The Fed watches price measures closely to determine how fast to raise interest rates but has signalled that the 2 per cent target is not a ceiling, and that it would be comfortable with inflation rising slightly above that level for a time. In the longer run, it maintained the forecast for 1.8% growth. Most officials expect the Fed would need to raise rates at least three more times next year and at least once more in 2020, leaving rates in a range between 3.25% and 3.5% by the end of 2020, the same end point officials projected in March. The committee's forecast for the long-run sustainable growth rate of the economy held at 1.8 per cent, suggesting policy makers are skeptical of the effect of tax cuts on the economy's capacity for growth. Inflation by the Fed's preferred gauge would hit its 2 percent target this year and edge up to 2.1 percent over the next two years.


"Economic activity has been rising at a solid rate", the FOMC said in its statement.

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.

"Household spending has picked up while business fixed investment has continued to grow strongly", the Fed said.

The committee sees further declines the unemployment. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

The Fed said its policy of further gradual rate increases will be "consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 per cent objective". The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments.

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