US Federal Reserve lifts rates amid stronger inflation

US Federal Reserve lifts rates amid stronger inflation

Federal Reserve Chairman Jerome Powell announced Wednesday that as from January 2019, he will hold press conferences after every policy meeting. Ahead of the announcement, markets were pricing in a almost 100% chance of a rate hike.

The Federal Reserve on Wednesday announced that it raised its benchmark interest rate, as had been widely expected.

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. Fed officials forecast an unemployment rate in the fourth quarter of 3.5 percent in both 2019 and 2020.

In another hawkish development, the Fed has also removed its forward guidence in its monetary policy statement.

August gold futures last traded at $1,299.20 an ounce, relatively unchanged on the day.

"We've got the rate hike and we've got another two hikes this year being priced in on the dot plan", said Amo Sahota, director at Klarity Fx in San Francisco. US growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank's 2 per cent target for two months.

Fed officials project gross domestic product increasing 2.8 percent this year, up from an earlier projection of 2.7 percent.

The median estimate for economic growth this year rose to 2.8 per cent from 2.7 per cent in March, with projections unchanged for 2.4 per cent in 2019 and 2 per cent in 2020.

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability".

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 Fed expects inflation to overshoot its target faster than it previously thought, prompting it to raise its forecast for rate hikes this year.

In a technical move, the central bank also chose to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range. The action means consumers and businesses will face higher loan rates over time. "I think it's more just, we are just looking at the economy and what does it need and how do we sustain the expansion, keep the labour market strong and try to keep inflation near 2 percent". That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

Core inflation projections, which strip out volatile food and energy prices, is expected to tick slightly higher to 2.0% this year, up from March's projection of 1.9%.

Fed says indicators of longer-run inflation expectations are little changed; drops previous references to market and survey-based measures of inflation outlook.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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