Fed raises rates amid improved USA economic outlook

Federal Reserve Chair Janet Yellen speaks during a news conference in Washington, Wednesday, March 15, 2017.

The US Federal Reserve, on expected lines, increased interest rates by 25 basis points (bps) on Wednesday, pushing stocks up while bond yields fell on the supportive economic outlook.

Banks still haven’t raised savings rates from the last time the Fed raised its rate in December, according to WalletHub. “Yellen was very, very clear” that although she sees risks to the economy as balanced and sounded more optimistic, she’s going to stick to three rate hikes this year and three next year, he said. But market turmoil early in 2016 and mixed United States economic signals meant the Fed could not move to increase rates again until a full year later.

A report from the National Association of Home Builders/Wells Fargo showed that confidence among United States homebuilders climbed in March to reach the highest level since 2005.

At the moment the Federal Reserve is expecting a total of three rate increases this year, although Fed chair Janet Yellen said it was too soon to say what effect President Donald Trump’s plans to cut taxes and increase spending might have on the direction of the USA rate. Improving real economic data, continued strong labour market gains and a rise in headline inflation set the stage for the FOMC to deliver the first of three projected 2017 tightenings. The price index of personal consumption expenditures (PCE) jumped by 0.4 percent in January, showing a 1.9-percent increase for the last 12 months and thus approaching the central bank’s own long-term inflation target of 2.0 percent for the first time in almost five years. And for Trump supporters who see everything in stark, political terms, the Fed’s move to lift interest rates – by 0.25 percentage points – could be a frustration.

Some analysts speculated that Fed officials also could indicate a faster pace of rate hikes this year and next.

Hence the key messages from Yellen on Wednesday were that rates will continue to rise but at a cautious pace.

“The last couple of times the Fed made a move, the rates firmed up in advance of the decision, and when it happened they kind of faded”, said Keith Gumbinger, vice president of HSH.com. Uncertainties remain – not least which policies President Donald Trump chooses to introduce. Steady hiring has brought down the unemployment rate to 4.7 per cent, while the Fed’s preferred measure of inflation has been moving closer to the central bank’s preferred target of two per cent. United States dollar sank to a three-week low of 100.540 against a basket of currencies. After all, the U.S. Treasury is the foundation upon which the rest of global finance is built. “It will be bad for the federal budget and will be bad for household and housing market as well”, he said.

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