Federal Reserve hikes key interest rate for second time in 2018

Fed Chairman Jerome Powell

While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end. The statement the Fed issued today after its latest policy meeting ended suggested that he does. Risks to the economic outlook appear roughly balanced.

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".

US Treasury yields rose after the Federal Reserve raised its key rate and signaled two more hikes this year, a greater amount than previously expected.

Federal Reserve Chair Jerome "Jay" Powell said job gains are boosting income and confidence, while foreign expansion and tax cuts support additional growth. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it. The Fed expects inflation higher than 2% over the next two years, according to its latest projections.

The 3.8-percent jobless rate is close to the lowest level ever seen in the U.S. There are more job openings than workers seeking employment in the country for the first time in recorded history, and recent inflation data shows prices inching through the Fed's ideal threshold. Five believe one more hike is needed in 2018; seven want two more hikes; and one wants three. Inflation expectations are slightly higher this year compared to March's forecast of 1.9%. Estimates of the long-run sustainable unemployment rate were unchanged at 4.5 per cent. That reflects the fact that the U.S. recovery after the crisis has been stronger, and inflation is getting closer to the Fed's target.

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The Fed's preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years.

That index now is at 2 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.

U.S. President Donald Trump will meet with his top trade advisers on Thursday to decide on whether to activate the tariffs, a senior Trump administration official said.

The FOMC's economic growth forecasts were little changed, with 2018 GDP seen rising 2.8 per cent rather than 2.7 per cent, but unchanged at 2.4 per cent in 2019, and 2 per cent in 2020. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally nearing the Fed's target level.

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