U.S. Federal Reserve Raises Key Interest Rate to 1.75-2 Per cent

Washington: The U.S. Federal Reserve raised the benchmark lending rate today, the second increase of the year, and signaled two more hikes were coming in 2018 and four in 2019, a possible sign of concern about accelerating inflation.

The unanimous vote brings the federal funds rate to a range of 1.75-2.0 per cent but the quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4 percent rather than the 2.1 per cent projected in March.

That implies four total rate increases this year. The Fed last raised the benchmark in March, the sixth increase since December 2015 as it tries to keep the economy growing at a sustainable pace without fueling inflation.

The reflection of increased fears about rising prices is likely to surprise markets, as most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

In another slight change of language -- something sure to catch the attention of Fed watchers -- it said "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric two per cent objective over the medium term."

The use of the term "symmetric" and "medium term" is a clear indication the Fed is not in a hurry to get inflation to two percent and will be comfortable if prices rise above that level for a short time.

In its quarterly Summary of Economic Projections, officials projected the Fed's preferred inflation measure will accelerate only slightly, ending this year at 2.1 per cent rather than 1.9 per cent, and holding at that level through 2020.

That index currently is at two per cent, but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed.

The Fed watches price measures closely to determine how fast to raise interest rates but has signaled that the two percent target is not a ceiling and that it would be comfortable with inflation rising slightly above that level for a time.

The already historically low unemployment is projected to fall even further, ending the year at 3.6 per cent before settling at 3.5 per cent in 2019 and 2020.

Emerging countries with weaker economies like India will be severely hit because a rate hike will trigger capital outflows from these economies. This is because money will flow towards U.S. markets as the interest differential between emerging markets and U.S. market falls.

Fed rate hike could reverse the foreign inflows that are much needed for the economic growth.  Capital outflows leads to contraction in economic activity, increase in external liabilities and increase in interest rates. (With Agency inputs)

(The above story first appeared on LatestLY on Jun 14, 2018 06:55 AM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).