Fed announces US rate increase

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Jerome .
AFP/Getty

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Federal Reserve Chair Jerome “Jay” Powell

The US central bank has said it will raise its benchmark interest rate citing a strengthened economic outlook.

The Federal Reserve said it had decided to raise the rate by 0.25% to a target range of 1.5% to 1.75%.

The central bank also hinted at future rate increases in its projections for coming years.

The Fed is trying to balance low unemployment with the potential for higher inflation spurred in part by federal spending and tax cuts.

So far the Fed has moved cautiously as it shifts the US away from the ultra-low rates put in place following the financial crisis.

But there are new faces on the Federal Open Markets Committee, which votes on interest rates, raising the possibility that policymakers may move more quickly.

Economic conditions have also shifted. The US economy grew at an annualised rate of more than 3% during some quarters last year, while the unemployment rate is hovering at 4.1% – the lowest since 2000.

Inflation has continued to lag the Fed’s 2% target rate, but analysts have said they expect wages and prices to increase this year.

“A rate hike at this time is reasonable, as the [committee] tries to balance the competing aims of, on the one hand, raising inflation up to the 2% target, and on the other, limiting the risk of overheating that would necessitate a sharp increase in interest rates later that could be destabilizing,” said Ken Matheny, executive director for US economics at Macroeconomic Advisers by IHS Markit.

A rise in the Fed’s benchmark federal funds rate typically leads to higher rates for consumers and businesses.

Savers benefit, but borrowing becomes more expensive, which can dampen activity in industries such as housing and car sales and raise costs for businesses that rely on debt.

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