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Fed Raises Key Interest Rate For The Fourth Time Since 2015
October 21 2017, 07:18 | Clarence Walton
Greg McBride, Bankrate's chief financial analyst, said: "As expected, the Federal Reserve followed through with an interest rate hike - the third in the past six months and fourth in the past 18 months".
The moves Wednesday mark the latest test of the economy's ability to stand on its own as the central bank dials back the extraordinary stimulus measures it unleashed through successive bursts of bond purchases to boost household and business spending after the 2008 financial crisis. The Fed now finds itself in a conflicted position, as it must balance the need to revitalise the slowly depreciating U.S. dollar (an objective aided by a rise in rates) with acquiring its target of price stability in the form of a 2% inflation rate. Super-low unemployment, gains in factory output and other economic data pointing to a recovery in the USA economy have led investors to believe that the Fed will lift rates.
By the end of the year, the Fed projects its benchmark rate will be at a neutral level, neither stimulating nor dampening economic growth.
The rate hike was as expected, with policy makers voting to raise interest rates to a range of 1% to 1.25%, despite weaker inflation and some signs of economic softening.
Still, even with another rate hike, the impact on consumers and businesses is likely to remain mild, as rates remain very low, relative to years ago, Amis noted.
Wednesday's decision was made with an 8-1 vote, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, dissenting.
"It's a Fed day and the markets will likely not blink an eye as the FOMC raises rates by 25 basis points", said Peter Cardillo, chief market economist at First Standard Financial in NY.
Among the elements could be an affirmation that the Fed wishes to use short-term interest rates as its primary tool for steering the economy.
Traders have placed a 91 percent chance of the central bank pulling the trigger on a second rate increase this year. Along with the statement, the FOMC will also release a new set of economic forecasts (gross domestic product [GDP], the unemployment rate, inflation, and fed funds projections, also known as the "dot plots").
However, Sydney climbed more than one percent and Hong Kong staged a late bounce to end up 0.1 percent.
But the rate increase was already priced into most stocks. Inflation eased to 1.5% in May from 2% in April.
Futures markets on Tuesday indicated a near 100 percent probability the Fed would increase the key lending rate at the conclusion of its meeting on Wednesday. Those forecasts are far below the 3% annual growth the Trump administration has said it can achieve with tax cuts, deregulation and tougher enforcement of trade rules to protect American jobs. Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.
Some news reports have mentioned leading candidates to fill the three vacancies on the Fed's seven-member board. They include Randal Quarles, a top Treasury official in two past Republican administrations, for the vice chairman's job of overseeing bank regulation.
Although there is reason to believe that the European Central Bank will also move towards a more hawkish stance, this is unlikely to occur until 2018.
The low unemployment rate suggests the labor market is approaching full employment, supporting tightening monetary policy. Trump has both praised and criticized Yellen so it's unclear whether he'll renominate her.