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Fed raises interest rate by 0.25% in line with expectations

14-Jun-2018

The US central bank concluded its meeting on Wednesday and decided to raise interest rate by 0.25% to 1.75-2% in line with market expectations. Fed however indicated possibility of two more rate hikes this year, a shift from previous stance of three hikes.

Fed Chairman Jerome Powell told reporters that unemployment and inflation are both low, and that raising rates too slowly or quickly could be harmful. He added that the bank won't over- react to inflation levels above 2%. Powell also announced he would hold press conferences at every Fed meeting starting in January.

The possibility of two more rate hikes is positive for US dollar however we have seen little market reaction as market focus shifted to disappointing Chinese economic data, concerns about US-China trade war and European Central Bank's monetary policy.

On interest rates- the Fed dot plot now shows that interest rate may rise to 2.4% at end of 2018, as against previous estimate of 2.1%. This indicates possibility of two more 25 basis points rate hikes this year. Fed forecasts however indicate three rate hikes in 2019 unchanged from last meeting.

On economy- Fed raised 2018 GDP growth estimate from 2.7% to 2.8%. Unemployment rate forecast was lowered from 3.8% to 3.6%. Inflation estimate raised from 1.9% to 2.1%. GDP and inflation estimate for 2019 kept unchanged at 2.4% and 2.1% respectively.

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