Fed hikes key rate for third time this year

Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee policy meeting in Washington U.S

Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee policy meeting in Washington U.S

The US Federal Reserve has raised interest rates for the third time this year, taking the range of its Federal Funds Rate to between 2.00pc and 2.25pc, up by 0.25 percentage points.

The Fed dropped phrasing it had used for years that characterized its rate policy as "accommodative" by favoring low rates.

"The Fed seems to have grown more convinced of the need to keep raising rates beyond neutral levels".

Analysts expect the central bank to increase the target for the bank's benchmark rate by 0.25%, to a range of 2%-2.25%.

The central bank stuck with its previous forecast for a fourth rate increase before year's end and for three more hikes in 2019.

Wall Street did not appear terribly happy about the Fed decision, and after an initial uptick the 3 major stock indexes finished the day lower, although such moves are not unusual on the day of an interest rate move.

For comparison purposes, the Bank of Canada's benchmark interest rate sits at 1.5 per cent, but that is also widely expected to rise next month to 1.75 per cent.

The Fed's latest projections show the economy continuing at a steady pace through 2019, with gross domestic product growth seen at 2.5% next year before it slows to 2.0% in 2020 and to 1.8% in 2021, as the impact of the recent tax cuts and government spending fade. But the gains faded in the last 30 minutes of trading after Fed Chairman Jerome Powell finished speaking at a news conference.

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Voters on the committee backed the decision 9-0.

Mr Powell and other economists say the economy is strong enough now that such stimulus is no longer necessary.

The Bank of Singapore estimates another rise by the U.S. central bank in December, three more in 2019 and one in 2020 which "would leave policy in slightly restrictive territory", with interest rates at 3.4 per cent by 2020 compared to a neutral rate of 3 per cent.

U.S. tariffs and retaliatory levies by others could slow the global economic growth, but broad-based tariffs could also stoke inflation by raising the prices of imported goods.

The Fed, created by Congress in 1913, has for a generation been given a wide berth to set monetary policy without interference from elected officials. Any signal in that change, however, is unclear. "Many of our country's economic challenges are beyond the scope of the Fed".

Fed officials, in the statement, repeated their assessment that "risks to the economic outlook appear roughly balanced".

The 10-year US Treasuries yield fell more than 5 basis points to 3.048 percent.

Higher U.S. rates, though, may force more emerging markets to tighten monetary policy to defend their currencies at a time when investors are punishing those with fault lines such as large current-account deficits.

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