Fed raises key rate and sees possible acceleration in hikes

Fed raises key rate and sees possible acceleration in hikes

(Kitco News) - Gold prices are holding steady just below the psychological barrier of $1,300 an ounce after the Federal Reserve suggested that it will hike interest rates more aggressively this year and the next as the USA economy continues to grow.

The Fed now sees gross domestic product growing 2.8% this year, slightly higher than previously forecast, and dipping to 2.4% next year, unchanged from policymakers' March projections.

Two additional rate hikes are predicted this year, for a total of four. It will rise to between 3.00 and 3.25 percent at the end of 2019.

The Fed's preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years. At the same time, they project the unemployment rate to fall to 3.6 percent this year, down from earlier projections of 3.8 percent.

The so-called " dot plot" released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee's symmetric 2 per cent objective over the medium term. The statement by Fed officials explaining the vote also hinted at a slightly faster pace for future rate increases.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 percent.

This marks the highest level of interest rates in the United States since 2008, although the benchmark rate remains below the historical average.

This hike, which was widely expected, is the Fed's second of 2018, and the central bank signalled it is likely to do two more increases by the end of this year.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

Also notable was that the Fed deleted about 80 words of its statement that said it expected the economy to "evolve in a manner that will warrant further gradual increases" in rates. But that exorbitant rate is likely to go up to 15.57% within two billing cycles, CompareCards says, as lenders pass along the higher rates to clients. When the Fed tightens credit, it aims to do so without derailing the economy.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation. But if it miscalculates and overdoes the credit tightening, it can trigger a recession. Should the Fed's expectations prove accurate, its policy would then be meant to slow the economy. It will become the longest if it lasts past June 2019, at which point it would surpass the expansion that lasted from March 1991 to March 2001.

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