US Federal Reserve raises interest rates to 2%

Projections by the Fed’s policymakers signalled one further quarter point rate hike later this year, followed by three in 2019 and three in 2020.

Ben Chu
Economics Editor
Wednesday 26 September 2018 19:36 BST
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Federal Reserve Chairman Jerome Powell takes his seat before making the semiannual monetary policy report to the Senate Banking Committee on Capitol Hill in Washington.
Federal Reserve Chairman Jerome Powell takes his seat before making the semiannual monetary policy report to the Senate Banking Committee on Capitol Hill in Washington.

America’s central bank hiked interest rates on Wednesday to cool the US economy, despite concerns about the impact of Donald Trump’s trade war.

As expected by financial markets, the Federal Reserve’s Open Market Committee, led by chair Jerome Powell, voted to increase the cost of borrowing from 1.75-2 per cent to 2-2.25 per cent, its third hike of 2018.

“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 percent objective over the medium term,” it said in a statement, released after its latest two day meeting.

Projections by the Fed’s policymakers signalled one further quarter point rate hike later this year, followed by three in 2019 and another three in 2020.

Fears have grown that the President’s trade war and his this month decision to slap levies on an additional $200bn of Chinese imports could upset the progress of the US recovery.

There are also concerns about Republican tax cuts overheating the economy and possibly bringing on a recession.

But the Fed’s statement did not mention either danger, only saying that ”risks to the economic outlook appear roughly balanced”.

The Fed expects US GDP growth to hit 3.1 per cent in 2018, up from its previous expectation of 2.8 per cent, before slipping back to 2.5 per cent in 2019 and 2 per cent in 2020.

“Our view is that the Fed will press ahead with gradual rate hikes for now, but that officials are still underestimating just how quickly the economy is likely to lose momentum next year, as the fiscal boost fades and monetary tightening bites,” said Michael Pearce of Capital Economics.

“As economic growth slows below its potential rate around the middle of next year, we expect the Fed to call time on rate hikes and ultimately begin cutting rates by early 2020”.

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