US Federal Reserve raises key interest rate to 1.75-2%

Jerome Powell and the Federal Reserve building in Washington D.C

Jerome Powell and the Federal Reserve building in Washington D.C

"The central bank raised its benchmark short-term interest rate a quarter of a percentage point on Wednesday, and indicated two more hikes will likely come this year", writes CNBC.

The unanimous vote brings the federal funds rate to a range of 1.75 to 2 per cent, but the quarterly economic forecasts show central bankers now expect the rate to end the year at 2.4 per cent rather than the 2.1 per cent projected in March.

In its updated forecasts, the Fed envisions stronger growth this year - 2.8 per cent, up from the 2.7 per cent it predicted in March. Fed Chairman Jerome Powell said at a news conference that the U.S. economy has strengthened considerably since the 2007-08 recession and is in "great shape".

"The economy is in great shape", Powell said.

The new median forecast projects the Fed's benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast.

The change will start in January following the meetings that are scheduled roughly once every six weeks, to give the Fed "more opportunities to explain our actions", Mr Powell told reporters. As elsewhere in the Eurozone, the overall production number was held back by a sharp drop in energy production in April and manufacturing trends are not quite as weak, still, in the light of other disappointing data releases, the numbers add to signs that the Eurozone recovery is already running out of steam.

The Federal Reserve is guiding a USA economy that is as close to ideal as it could have dreamed a decade ago, when the darkest days of the recession forced it to take big risks to protect workers, banks and economies around the world from further devastation. The central banks in Japan and the Eurozone still have their main rates at or close to zero. The projections show inflation rising 2.1% for the next three years. Much of the increase is tied to fast-rising gasoline prices.

The Federal Reserve raised its key rate by 25 basis points and signaled two more rate hikes this year.

The Fed's pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including from a potential trade war that could break out between the United States and such key trading partners as China, the European Union, Canada and Mexico. 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.

Greg McBride, chief financial analyst for the interest rate website Bankrate.com, said that could "squeeze" families if wage growth remains sluggish.

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