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Fed raises rates, with 2 more hikes expected in 2018

Central bank accelerates pace as inflation ticks up

The U.S. Federal Reserve raised interest rates for the first time in three months.   © Reuters

WASHINGTON -- The U.S. Federal Reserve raised interest rates by 0.25 percentage point on Wednesday and projected two more quarter-point increases this year, accelerating its tightening in response to growing inflationary pressure.

The Federal Open Market Committee's eight voting members decided unanimously to raise the target range for the federal funds rate to 1.75% to 2%, according to a statement released after a two-day meeting. This follows a 25-basis-point hike in March.

The committee's median monetary policy forecast now calls for four rate increases this year, up from three after the March meeting. The central bank raised rates just once in 2015 and 2016 and three times in 2017.

"The economy is doing very well," Fed Chairman Jerome Powell told reporters on Wednesday. "Most people who want to find jobs are finding them and unemployment and inflation are low. Interest rates have been low for some years, while the economy has been recovering from the financial crisis," he said.

The upgraded outlook comes with inflation reaching the Fed's 2% target. The personal consumption expenditures price index -- the central bank's preferred indicator -- showed 2% year-on-year gains in March and April. The FOMC forecasts inflation running slightly above its target at 2.1% in the October-December quarter, giving the Fed more reason to step in to keep the economy from running too hot.

The U.S. economy appears firm, with unemployment at an 18-year low. Some expect real economic growth to reach the 4% range in the April-June period, owing to last year's tax cuts and growing government spending. For October-December, FOMC members' median estimate is for 2.8% growth, above the expected 1.8% potential growth rate. Support for accelerating the pace of rate hikes is gaining traction in the Fed amid deepening confidence in price trends and the economy's health.

"Business investment continues to grow strongly, and the overall outlook for growth remains favorable," Powell said. 

In the FOMC's post-meeting statement, the Fed did away with previously used language predicting that "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." At the current rate of increase, policy rates would reach the median long-term target rate of 2.9% in mid-2019.

But two and a half years into the Fed's monetary tightening phase, some see an end to rate hikes on the horizon. Median predictions by FOMC members point to three hikes in 2019 and just one in 2020.

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