Federal Reserve hikes interest rate to highest level in a decade

EURUSD Daily

EURUSD Daily

The Fed raised rates as expected on Wednesday in its first meeting under Chairman Jerome Powell.

"The economic outlook has strengthened in recent months", the Fed said in a statement following its two-day Federal Open Market Committee meeting.

The Fed statement said monetary policy continues to provide stimulus to the economy, and repeated that even with "further gradual adjustments. economic activity will expand at a moderate pace".

General Mills slid more than 8 percent after the Cheerios cereal maker cut its yearly earnings forecast, citing a sharp increase in freight and commodity costs. Wednesday's rate change is the sixth since 2015.

But the Fed's new forecast does envision marked increases in economic growth compared with its previous estimate: It raises the estimate to 2.7 percent growth this year, up from 2.5 percent in the December projection, and 2.4 percent in 2019, up from 2.1 percent. But officials were divided, with slightly less than half indicating they expect to raise rates at least four times this year.

The Fed raised its projection for economic growth this year.

Sterling finished up 1.01 percent at $1.4140 after data showed United Kingdom wages grew at their fastest pace in more than two years, supporting bets that the Bank of England would raise interest rates as early as May. "But with the USA output gap closing, and fiscal policy ramping up, it's a matter of time before he will need to make tougher decisions that really might upset his boss", Nash said.

"In theory, if you have lower unemployment, you should have higher inflation", North said, adding that "we haven't seen that in this recovery" for reasons including weak productivity growth.

The central bank's decision was a response to a sunnier economic outlook, very low unemployment and rising wages.

Since the start of the year, economists have been downgrading their estimates for growth in the January-March quarter growth to reflect a slowdown in consumer spending, which most analysts think will prove temporary. The unemployment rate remained at a 17-year low of 4.1 percent.

However, the range of estimates for the federal funds rate reveal officials are split nearly exactly down the middle with eight expecting no more than three rate hikes this year and seven projecting four moves or more. As banks are charged more for money, they can raise rates on small business loans, credit cards and mortgages. Since the last meeting in December, Congress passed a $3.5 billion tax cut and a two-year, $300 billion funding increase.

Fears over a trade war also come as markets are anxious for clarity about what kind of monetary policy regime will be pursued by new Fed chair Jerome Powell.

Powell then commented on the strength of the economy and projections for future rate increases as inflation remains below the Fed's target of 2% despite a host of strengthening signs in the labor market. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term.

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