July 19, 2018
Business

Federal Reserve raises interest rates and signals more hikes

The Federal Reserve raised its key interest rate today as it continues its efforts to normalise monetary policy with officials' projections pointing to four hikes in total during 2018.

The US central bank moved the target range for its federal funds rate to 1.75 per cent to two per cent.

Markets had priced in a rate hike as a near certainty ahead of the meeting, with all eyes on the economic projections of the Fed's economists and prospects for more increases in the second half of the year.

The closely watched "dot plot", which indicates the views of the rate-setting Federal Open Market Committee (FOMC) on the future course of monetary policy, showed that eight of the 15 voters foresee at least two more quarter-point increases during this year.

Read more: Higher oil prices to boost UK inflation with ECB and Fed in tightening mood

Federal Reserve chair Jerome Powell has consistently pointed to a need for a gradual tightening in monetary policy, with one interest rate rise already under his belt, at the central bank's meeting in March.

There are four remaining meetings this year, with Powell due to give a press conferences in September and December.

The Fed's policy statement said that the "labour market has continued to strengthen" and added that economic activity "has been rising at a solid rate".

The statement said that "further gradual increases" would be necessary to keep inflation stable near its symmetric target of two per cent.

Read more: DEBATE: Will Janet Yellens departure signal a shift in US monetary policy?

Risks to the outlook remain "roughly balanced", the FOMC said, in spite of concerns that a potential trade war sparked by US President Donald Trump could dent global growth.

The hawkish sentiment from the Fed boosted the US dollar, with sterling losing its gain for the day to fall back below $1.334.

Peter Ashton, managing director of Eiger FX, said: "Whilst the currency markets had priced in a rate hike as a near certainty, the news that the Fed has boosted its outlook to four rate hikes this year has seen sterling come under renewed pressure."

Read more: New Fed boss Jerome Powell says "gradual" rate rises are needed

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