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Confident Fed Raises Rates, Signals Two More Hikes In 2018

America faces a possible two more rate rises in 2018 after the US Federal Reserve on Wednesday raised its benchmark federal-funds rate by 0.25% to 2%.

It was the second rate rise this year and another three rate rises could happen in 2019, according to the Fed’s dot plot which shows where members think rates will be in the next year or so.

US markets weakened ahead and just after the Fed issued its post meeting statement, but then turned higher as they realised the tone of the comments were more upbeat than expected. Nasdaq though strengthened to a series of new all time highs while gold and oil firmed.

But by the close the Dow, the S&P 500and Nasdaq had all fallen back into negative territory.

The S&P 500 fell 11.22 points, or 0.4%, to 2,775.63. The lost 119.60 points, or 0.5%, to 25,201.13 and Nasdaq Composite which had earlier set an intraday record at 7.748.96, fell to close 8.09 points, or 0.1%, lower at 7,695.70.

The Fed moved its federal funds a range of 1.75% and 2% and forecast it expected to raise rates four times this year, up from a predicted three in March. That means two more increases this year.

But two more rate rises this year remains a chance, not a certainty as the difference between three and four increases this year remains extremely narrow. Eight Fed officials said they expected interest rates to rise at least four times while seven see three rate hikes.

The central bank made several changes to the statement which indicates the central bank is more confident in the economy - a point made in the post meeting forecasts and the media conference by chair Jay Powell.

The Fed has dropped the language that the federal funds rate was “likely to remain, for some time, below levels that are expected to prevail in the longer run.”

This is a signal the Fed no longer thinks money is cheap, although it is not sure how far the its benchmark rate will rise to.

The Fed also removed language that it would “carefully monitor” inflation. The central bankers also noted that the economy was growing at a “solid” rate.

The Fed lifted its GDP forecast for 2018 to 2.8%, up 0.1 percentage point from its March projection, but its estimates for 2.4% growth in 2019 and 2% in 2020 were left unchanged.

Inflation is forecast to be a bt higher than in March - the Fed’s preferred measure of inflation, the core personal consumption expenditures index (PCE), is now forecast to reach 2.1% this year, compared to a March projection of 1.9%.

Forecasts of 2.1% in 2019 and in 2020 were left unchanged.

The Fed also sees the US jobs market a bit tighter than previously. The unemployment rate to fall to 3.6% this year, down from 3.8% in its March projection (and an actual 3.8% in May).

The bank also sees the rate falling further, to 3.5% in both 2019 and 2020, having previously forecast a reading of 3.6% in both those years.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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