The Federal Open Market Committee meeting on Wednesday ended with a conclusion to officially raise interest rates by 25 basis points from 0.75% to 1% confirming market expectations that the bank will be announcing a rate hike this month.
Federal Reserve chair Janet Yellen stated that the growing and stable economic growth, the strong jobs data report in the US and rising confidence that inflation rates are catching up with the target of the central bank has led them to lift interest rates once again after three months.
Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress.Today’s decision is in line with that view, and does not represent a reassessment.” said Yellen in a press conference.
The announcement of the rate hike has been awaited by the markets in the past month as the US dollar grew stronger to a seven-week high against a basket of other currencies and signals from different fed officials regarding another interest hike on top of the previous one the fed announced last December.
Aside from the interest rate hike, FOMC members also came up with an agreement to hold a total of three hikes this year instead of two exceeding expectations in the coming quarters of a more aggressive forecast for monetary tightening.
In a statement from the FOMC, the improving market and labor conditions have led them to decide to raise the federal fund's rate target range. The markets are now forecasting that the next interest rate hike would be on the upcoming June 12 meeting.
China Reacts With Own Rate Hike
In their efforts to stop investors from shifting to US markets that now offer much higher returns, the central bank of China recently raised their interbank interest rates just a few moments after the Federal Reserve’s announcement.
The People’s Bank of China announced that they have raised rates by 10 basis points from 2.25% to 2.45%, therefore, lifting the seven-days reverse repo rate which has been one of the key policy rates of the central bank. This would be the second monetary tightening since last month at the end of the Chinese New Year celebration.
In their website, the bank stated that this is not a monetary policy change and added that their benchmark deposit and lending rates remain unchanged.
The central bank also raised their Medium-term lending facility rate by 10 basis points which would help raise the price of longer-term funds given to banks.
As for the country’s economy, Premier Li Keqiang assured earlier this week that the government of China is prepared for whatever financial risks may strike at the economy and has taken necessary measures to counter them. Despite this, the market currently believes that the central bank’s recent move was for the country to keep up with the changing market.
Other central banks such as the Bank of England and Bank of Japan held their interest rates despite the fed’s recent move. BoJ currently enjoys a recovering economy driven by a weaker currency while the BoE is wary of rising inflation issues and disputes within the bank.
Fed Reserve Projections
The Federal Reserve primarily stated that the reason for the change in pace and the announcement of the interest rate hike was due to the positive economic activity and the strong momentum it has taken on recently.
Although the fed did not disclose any comments to Trump’s plans to boost and impact the country’s economy this year, the bank did state that adjustments in the monetary policy will help the economy expand at a moderate pace.
The fed also stands with their same forecast last December with the economy set to grow by 2.1% this year. Their unemployment rate forecast also remains unchanged at around 4.5% while their core inflation forecast was slightly higher at 1.9% versus their 1.8% forecast in December.