Fed raises rate and sees more hikes as US economy improves

Jon Howard
March 16, 2017

In Europe, stocks were up to their highest levels in two weeks, boosted by expectations of the U.S. rate hike and a recovery in oil prices.

Leading into Wednesday's decision, investors were predicting the odds of a rate increase at 95 percent. The key rate that banks offer to lend to each other overnight-which underpins the entire American financial system-will now be set between 0.75% and 1%, up from 0.5% to 0.75%.

The Federal Reserve, which has struggled to stoke inflation since the financial crisis and up until now raised rates less frequently than it and markets expected, may be about to hit the accelerator on rate hikes.

By doing so, he was following in the footsteps of his predecessor, Narayana Kocherlakota, a prominent dissenter against rate hikes.

Locally, the market appears to have reacted positively to the USA rate rise and is on track for a rise at the open. According to Freddie Mac, the average 30-year fixed-rate mortgage was 4.21% last week.

Rising rates might hurt borrowers, but they should be great for savers, right? The Fed wants to keep it that way. "On March 3, Fed Chair [Janet] Yellen said that unless employment and inflation data surprised, which they haven't, 'a further adjustment of the federal funds rate would likely be appropriate'". With interest rates at zero, the Fed has no way to juice a flagging economy. The gas pedal, if you will, is already pushed to the floor. "In the press conference, Chair Yellen gave balanced comments and reiterated that the FOMC has not significantly changed its assessment of the economy or the path of the hiking cycle since the last meeting".

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The policy statement cited the strengthening labor market and improving economy as reasons for the hike.

The unemployment rate dropped to 4.7% from 4.8% in January, just a notch above its decade low, while hourly wages for all private-sector workers rose six cents last month on average, but still up from the 5-cent gain the prior month and up 2.8% from February of a year ago.

Stocks were slightly higher in cautious trading on Wall Street ahead of what investors expect will be another interest rate increase from the Federal Reserve.

The April gold contract climbed $8.10 at US$1,210.70 an ounce, May copper contracts were up three cents to US$2.66 a pound and April natural gas contracts also rose three cents at US$2.97 per mmBtu.

The 5-year forward inflation expectation rate, a market gauge tracked by the Fed, now stands at 2.14 percent, up from 1.60 percent one year ago.

Many economists are blaming slow February numbers on a delay in the IRS issuing tax refunds.

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