Thursday 16, March 2017 by Georgina Enzer

US Federal Reserve boosts interest rate

The US Federal Reserve has raised the benchmark interest rate for the second time in three months.

The Rate was raised by a quarter of a per cent due to rising confidence that the US economy is set for more robust growth, according to the statement by the US Federal Reserve Bank. The hike takes the overnight funds rate to a target range of 0.75 per cent to one per cent.

“In view of realised and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to one per cent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to two per cent inflation,” the statement read.

According to the statement, information received since the Federal Open Market Committee met in February 2017 has indicated that the labor market has continued to strengthen, and that economic activity has continued to expand at a moderate pace.

US Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat, according to the statement. Inflation has increased in recent quarters, moving close to the Committee's two per cent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below two per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around two per cent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments,” read the statement.

The news of the hike made government bonds slide lower, while US stock market averages increased. Following the announcement, several central banks in the GCC also hiked their interest rates, including the Central Bank of Bahrain and the Central Bank of Kuwait.

The market currently expects the Fed to hike the rate two more times this year, in line with the bank’s projections from December 2016.

The Fed on Wednesday indicated that it still expects three moves. In its statement, the central bank noted that business investment has "firmed somewhat," a slight upgrade from the characterization of "soft" after the 31 January 2017 meeting.

The market expects the next hike to come in June and another in December. Those probabilities increased a bit following Wednesday's decision.

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