Fed Lifts Interest Rates, Expects 3.6% Unemployment

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Wall Street's top banks expect the U.S. Federal Reserve to raise interest rates twice more this year and three times in 2019, in line with forecasts issued Wednesday by central bank policy makers who signaled a modest acceleration to their pace of rate hikes along with increased confidence in the economy.

The federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, now stands at a range of 1.75% to 2%. The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March. "The overall outlook for growth remains favourable".

The Fed statement also underscored the committee's commitment to growth even though it was notching up the pace of rate hikes this year.

Fed officials expect to raise rates two more times this year for a total of four hikes; in March, they expected three rate hikes.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation. "The trajectory of U.S. inflation or the broader USA economy would likely need to change materially for the FOMC to deviate from that path", said Aaron Anderson, senior vice president of research at Fisher Investments.

US Treasury yields rose after the release of the statement while US stocks were trading marginally lower.

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He also said the USA had a trade deficit of $17 billion with Canada, though he implied that it might be as large as $100 billion. He added that Canada will "move forward with retaliatory measures" on July 1 against the U.S.

Fed Chairman Jerome Powell announced during a press conference that he will hold such briefings after every policy meeting instead of quarterly as from January 2019. The Fed chief now holds four such events each year.

"In view of realised and expected labour market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 per cent". The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

In their statement, Fed policymakers noted that the labor market "has continued to strengthen and that economic activity has been rising at a solid rate".

Negative for gold though is that the central bank also forecasts tame inflation pressures throughout year.

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 a sturdy economy enters a 10th straight year of growth. The Fed anticipates that inflation will be 2.1% in 2019 and 2020, which is a little over its target rate of 2% through 2020, but is viewed as manageable. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it. In the United Kingdom, the Bank has stopped actively buying financial assets and interest rates are up a little from their lows. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages".

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