15 December 2016
Washington DC
Reporter: Drew Nicol

US Federal Reserve commits to rate hike

The US Federal Reserve has raised the target range of the federal funds rate and hinted that further rate hikes may also be on the horizon.

It rose from 0.25 to 0.5 percent to a range of 0.5 to 0.75 percent.

The federal open market committee said yesterday (14 December) that its monetary policy remains “accommodative, thereby supporting some further strengthening in labour market conditions and a return to 2 percent inflation”.

This could imply that the Fed will deliver more than the two further hikes that are widely expected in the coming year.

The committee, which is chaired by Janet Yellen, added: “In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.”

In its statement on the Fed’s meeting, the committee confirmed that it expected only gradual increases to the federal fund rate, but that any future decisions would be based on incoming data.

The committee’s fund rate projections see median rates set at 1.4 percent in 2017, before finally hitting and marginally surpassing the Fed’s 2 percent target to sit at 2.1 percent. In the long term, the Fed currently foresees median rates returning to a more familiar 3 percent after 2019.

David Absolon, investment director at Heartwood Investment Management, said: ‘‘As expected the Fed went slightly more hawkish in projecting the future interest rate path, but it is no game changer.”

“The difference to last December is that this time inflation has a positive impulse. The market reaction in the next few days is not irrelevant, but it will be in January to see whether the market has over-tightened financial conditions.’’

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