Federal Reserve

Fed raises US rates and signals more to come, as Yellen cites an improving economy

US rates are hiked 25 basis points to range of 0.75 to 1.00 per cent

PUBLISHED : Thursday, 16 March, 2017, 2:02am
UPDATED : Thursday, 16 March, 2017, 9:02am

The US Federal Reserve raised interest rates on Wednesday, the second hike in three months in response to stronger employment numbers and rising inflation, and signalled two further increases this year.

“The simple message is the [US] economy is doing well,” Yellen said in a press conference in Washington DC, adding that the global economy is improving.

“Although the level of the neutral federal funds rate is probably quite low, we nevertheless have an accommodative policy and it will be appropriate to move toward a neutral stance if we continue on the path we’re on.”

The target overnight lending rate rose 25 basis points to a range of 0.75 to 1.00 per cent, according to a statement issued by the Fed after a two-day policy meeting in Washington DC.

The Fed had raised interest rates in December 2016 and planned to raise them further throughout 2017 as it aims to support stronger economic growth while keeping inflation pegged around 2 per cent.

“The Fed may have seen March as an opening too good to pass up,” Ryan Sweet, director of real-time economics and Moody’s Analytics, said in a research note. “Financial market conditions have eased, inflation has moved closer to the Fed target, and survey-based data have been strong. Also, raising rates now would allow the Fed to avoid being sidetracked by geopolitical events, including the elections in France.”

Announced earlier, US consumer prices increased 2.7 per cent year on year in February, the highest inflation rate since March of 2012, boosted by a rise in gasoline prices.

The Fed’s projections showed the economy growing 2.1 per cent in 2017, unchanged from its December forecast. The median estimate of the long-run interest rate, where monetary policy would be judged as having a neutral effect on the economy, held steady at 3.0 per cent.

Core inflation was seen as slightly higher at 1.9 per cent versus the previous 1.8 per cent forecast.

The rate increase came amid a broad improvement in the world economic outlook and a sense among Fed policymakers that the US economy is close to the central bank’s employment and inflation goals.

According to the policy statement, the risks to the outlook remained “roughly balanced.”

Minneapolis Fed President Neel Kashkari was the only official to dissent in Wednesday’s decision, saying he preferred to leave rates unchanged.

“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2 per cent inflation,” the Fed said in Wednesday’s announcement.

The ISM Manufacturing index, based on data compiled from a nationwide survey of purchasing and supply management executives, rose to 57.7 per cent in February, up from 56.0 per cent in January and its highest in more than two years. The index is a key indicator of economic health because it monitors employment, production, inventories, new orders and supplier deliveries.

“Looking at the details, the report provided even more upbeat results than the headline figure,” FocusEconomics said in its analysis of the February ISM Manufacturing index. “Both new orders and output sub-gauges hit multi-year highs in February.”

Meanwhile, the US Producer Price Index rose 0.3 per cent month over month in February, and rose 2.2 per cent on the year, compared with a 1.6 per cent year on year increase last month.

The US unemployment rate fell to 4.7 per cent in February from 4.8 per cent in the previous month.

With additional reporting by Reuters