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The Federal Reserve, the central bank of the United States, raised its benchmark target for the federal funds rate by 25 basis points to 0.75 percent "in view of realized and expected labour market conditions."


The rate increase was the second tightening of monetary policy by the Fed in the last decade (since July 2006) and follows a similar-sized increase 12 months ago in December 2015.


The decision was unanimous by the Fed's policy-making body, the Federal Open Market Committee (FOMC), and is in line with expectations in financial markets. At its last meeting in November, two of the 12 FOMC members had voted to raise the rate by 25 basis points.


In its statement, the FOMC said the labour market had continued to strengthen and economic activity had been "expanding at a moderate pace since mid-year," a slightly more upbeat message than in its November statement when it said growth of economic activity "had picked up from the modest pace seen in the first half of the year."

In its update to economic projections, the forecast for the federal funds rate in 2017 was raised to an average of 1.4 percent from 1.1 percent seen in September, indicating that the Fed may raise rates three times - a projection that echoes that of financial markets - instead of two times.


For 2018 the Fed expects the fed funds rate to average 2.1 percent, up from 1.9 percent previously forecast, and then to rise to 2.9 percent in 2019, up from 2.6 percent. The longer run rate was also raised to 3.0 percent from a previous 2.9 percent.


Despite the raised forecast for the fed funds rate, there were only minor changes to the forecast for economic growth and inflation.


The 2016 Gross Domestic Product forecast was raised to 1.9 percent from 1.8 percent and the 2017 forecast to 2.1 percent from 2.0 percent. The 2018 forecast was unchanged at 2.0 percent while the 2019 forecast was raised to 1.9 percent from 1.8 percent.


In the third quarter of this year the U.S. GDP grew by an annual rate of 1.6 percent, up from 1.3 percent in the second quarter.


The forecast for Personal Consumption Expenditure (PCE) inflation - the Fed's preferred gauge - for this year was raised to 1.5 percent from 1.3 percent while the forecasts for 2017, 2018 and 2019 were unchanged at 1.9 percent, 2.0 percent and 2.0 percent, respectively.


Headline inflation rose to 1.6 percent in October from 1.5 percent in September.


The forecasts for the unemployment rate were changed slightly, with the Fed expecting an average rate of 4.7 percent this year, down from 4.8 percent seen in September. For 2017 the jobless rate is seen declining further to 4.5 percent from 4.6 percent previously forecast while for 2018 the forecast was unchanged at 4.5 percent. For 2019 the forecast was cut to 4.5 percent from 4.6 percent.


In November the U.S. jobless rate fell to 4.6 percent from 4.9 percent for the lowest rate seen recorded since August 2007.


As in November, the Fed considers near-term risks to its economic outlook as "roughly balanced" and it order to determine the timing and size of future changes to the target range it will "assess realized and expected economic conditions" relative to its objectives of maximum employment and 2 percent inflation.


The Fed also reiterated that it expects economic conditions to evolve in a manner "that will warrant only gradual increases in the federal funds rate," which is likely to remain, for some time, below levels that are expected to prevail in the longer run.