Fed raises US rates once again

Janet Yellen

The US Federal Reserve (Fed) raised its key interest rate by 0.25 percentage points at its December meeting. It is one of Janet Yellen’s final major acts as head of the US central bank.  The Fed left its rate outlook for the coming years unchanged from its projections in September.  This is the fifth increase since the Fed cut rates to close to zero in the wake of the 2008 financial crisis.

The Federal Open Market Committee (FOMC) has implemented a total three rate increases this year, taking the federal funds rate from a range of 0.5% to 0.75% to a range of 1.25% to 1.5%. Although the decision was widely anticipated, it was not, however, unanimous: two of the nine members of the FOMC voted against the rate increase.

Policymakers still anticipate three further rate increases in 2018 against an economic backdrop that has continued to strengthen.  According to Fed forecasts, the federal funds rate is predicted to reach 2.1% in 2018 and 2.7% in 2019, rising to 3.1% in 2020. The US economy grew at an annualised rate of 3.3% during the third quarter; meanwhile, the country’s rate of unemployment declined to 4.1% in November, reaching its lowest level since December 2009, and is expected to continue to decline to 3.9% in 2018.

Although the Fed appears to be relatively sanguine about the outlook – the central bank upgraded its forecast for US economic growth in 2018 from 2.1% to 2.5% – policymakers still believe further interest-rate increases will be “gradual”, reflecting the persistently subdued inflationary backdrop. Looking further ahead, however, the economy is predicted to grow by 2.1% in 2019 and 1.8% in the longer term, which is considerably lower than President Donald Trump’s goal of 4% growth.

“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further,” the Fed statement said.

“Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.”