Federal Reserve lifts interest rates, Wall Street slips on faster rate hikes

Federal Reserve expected to hike rates as Sterling slips

"The Fed deserves tremendous credit for steering the economy to calmer waters, supporting what is likely to be the longest expansion in USA history while meeting inflation and employment objectives", said Stephen Gallagher, chief US economist at Societe Generale.

While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end.

This hike, which was widely expected, is the Fed's second of 2018, and the central bank signalled it is likely to do two more increases by the end of this year. The move reflects the economy's resilience, the job market's strength and inflation that's finally nearing the Fed's target level.

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point".

Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period.

The so-called " dot plot" released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March.

The median average of the central bank's updated forecasts - also referred to as the "dot plots" - called for interest rates to end the year around at 2.4%, up from March's projection of 2.1%; The forecasts suggest the Fed will raise interest rates two more times this year.

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Fed raises interest rates as unemployment nears record lows
Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it. Powell faces a tricky balancing act as the Fed attempts to bring interest rates toward historical averages.

"The economy is doing very well", Powell said at a news conference after the meeting. In fact, the Fed didn't change its median longer-run growth estimate of 1.8 percent.

The Federal Open Market Committee indicated that even though it's stepping up the pace of interest-rate hikes, economic growth should continue apace. "Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly". The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March.

The rate hike on Wednesday was the seventh in this cycle and effectively marked a shift to a neutral stance in which the policy rate matches inflation at just under 2 percent, leaving zero "real" accommodation.

Fed says further gradual rate increases will be consistent with sustained economic growth, strong labor market and inflation near 2 percent over medium term.

Fed repeats near-term risks to the economy appear "Roughly balanced". The index rose 1.8 per cent in April from a year earlier.

"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 maximum employment objective and its symmetric 2 per cent inflation objective". Previously, the statement made separate references to survey-based and market-based measures of such expectations.

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".

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