Federal Reserve Hikes Interest Rates, Sees 2 More Hikes Coming In 2018

Canadian dollar weekly graph

United States Federal Reserve in Washington DC.

Sterling finished up 1.01 percent at $1.4140 after data showed United Kingdom wages grew at their fastest pace in more than two years, supporting bets that the Bank of England would raise interest rates as early as May.

The Federal Reserve raised interest rates Wednesday by a quarter of a percentage point and signaled that the central bank is on track to raise rates another two times in 2018, while expressing increased confidence in the economic recovery.

The statement also declared, in a change from January, that "the economic outlook has strengthened in recent months".

An increase in the Fed's benchmark federal funds rate typically leads to higher rates for consumers and businesses. The unemployment rate remained at a 17-year low of 4.1 per cent. The central bank continues to project three rate hikes in 2018.

The Federal Reserve on Wednesday lifted US interest rates as expected, enthusiastic about the road ahead, saying the economic outlook had strengthened in recent months. Global bonds and stock markets will follow the USA markets in the rally.

But consider that approximately $62.50 a year has already been added as a result of the Fed's five rate hikes since late 2015, and interest payments may be up by $100 at the end of the year. In January, officials described both economic activity and job growth as "solid", which is a less bullish term in Fed parlance.

The Fed officials say they expect to increase rates twice more this year and that in 2019, they estimate rate hikes 2 to 3 times, suggesting a speed up in the pace of credit tightening. The Fed's preferred inflation measure is forecast to end this year at 1.9 percent and barely move to 2.0 percent in 2019.

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Policy makers also maintained their inflation outlook of 1.9%, slightly below the Fed's target.

There was broad agreement that a March rate hike was virtually guaranteed.

Over the next few weeks, this increase will affect credit cards, adjustable-rate mortgages, vehicle loans, and other credit lines that don't have fixed rates. Many investors expected an upgrade, since the GOP approved major fiscal stimuli through $1.5 trillion in tax cuts and $300 billion in additional government spending.

Wednesday's rate hike is the sixth time the Fed has lifted interest rates since the economy collapsed in 2008.

"I think we could easily go to four, because if you look at the dot plot, all they needed was one more person to up their estimate", said Dan North, the chief economist at Euler Hermes North America, referring to the chart of FOMC members' forecasts.

Taken together, the Fed's actions and forecasts Wednesday suggest a belief that the economy remains sturdy even almost nine years after the Great Recession ended.

Central bankers admitted to being befuddled by the absence of inflation a year ago despite the economic recovery and strong job market, but Wednesday's statement repeated the view that 12-month inflation is expected to move up to the Fed's two percent goal "over the medium term".

The Fed's preferred gauge of inflation stands at 1.5%.

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