Federal Reserve raises key interest rate

Jerome Powell’s Slightly More Hawkish Policy Stance

In its first policy meeting under new Fed chief Jerome Powell, the United States central bank indicated that inflation should finally move higher after years below its 2 per cent target and that the economy had recently gained momentum.

Fed policymakers still envisioned three rate hikes in 2018 despite of improved economic outlook, according to the median forecast for interest rates.

Decision: Fed funds rate target range increased to 1.50% to 1.75%. An upside worry for inflation could be wage rises against a backdrop of near full employment (4.1%).

A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates.

Just focusing on the median of Fed officials' forecasts for interest rates, as Mr. Powell emphasized in his news conference, can mask the degree of the shift.

Bond yields rose and stocks held on to much of their gains after the Fed's announcement, which was widely expected. "The long term average real return on a USA ten year treasury bond runs around 2.5%". But it makes sense as the tax cuts should hype growth in a tight labor market environment and it will be the Fed's job to make sure that faster expansion doesn't get transmitted into too strong inflation. Officials continued to project two more rate hikes in 2018, followed by three moves in 2019 and two further increases in 2020. Before that, the benchmark rate was kept near zero to boost the economy after the Great Recession. So Powell's first meeting as the leader of world's most influential bank has investors nervous.

The Federal Reserve is the central bank of the U.S. It oversees 12 district banks, which together are responsible for the monetary policy of the U.S. This was also seen in upgrade projections for real GDP growth in the Survey of Economic Projections.

What does the hike mean for mortgage rates?

"The economic outlook has strengthened in recent months", the USA central bank said in a statement which followed its two-day meeting.

"This a new Fed chairman starting with a bit of a hawkish tone as he takes leadership".

In December, the Fed predicted U.S. gross domestic product (GDP) to grow 2.5 percent this year, 2.1 percent in 2019 and two percent in 2020.

A 10-year rate at 2.91 percent is "seriously mispriced given the Fed's dot plot forecast", Brusuelas said.

However, that rate is likely to remain under traditional levels for some time, it said.

The financial markets have been edgy for weeks, and Powell's back-and-forth comments have been only one factor. Although the growth rates of household spending and business investment appear to have moderated earlier this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid, he said.

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