US Fed raises key interest rate amid stronger growth outlook

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“Jay Powell is nearly certain to announce a rate hike today of 25bp, taking the Fed Funds target rate from its current 1.25 per cent to 1.5 per cent up to a new range of 1.5 per cent to 1.75 per cent. Markets will not respond to the hike per se, since it has been widely anticipated.

New Federal Reserve Chairman Jerome Powell said on Wednesday (Mar 21) the central bank sees no signs that prices are set to rise sharply in the United States economy.

In its statement, the Fed said the labor market "has continued to strengthen and that economic activity has been rising at a moderate rate".

The central bank is trying to balance a low unemployment rate with the potential for higher inflation. Some now envision an annual growth rate of just 1.7 percent for the quarter.

But the Fed's new forecast does envision somewhat stronger economic growth compared with its previous estimate: It raises the estimate to 2.7 per cent growth this year, up from 2.5 per cent in the December projection, and 2.4 per cent in 2019, up from 2.1 per cent.

Wall Street was on track for a lower opening on Wednesday as traders moved cautiously ahead of an expected Federal Reserve interest rate hike and continuing fallout from Facebook Inc's data privacy breach.

But among the Fed officials who met in Washington this week, Powell said, "there's no thought that changes in trade policy should have any effect on the current outlook".

The Fed "faces some key questions", says economist Mickey Levy of Berenberg Capital Markets.

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Other measures of the economy, though, have been more sluggish. And Levy wonders, "will the stronger economic momentum generate overheating" and push inflation too high?

The Fed's rate hike marks its sixth since it began tightening credit in December 2015.

Interest rates futures implied traders priced in the next rate hike at the Fed's June 12-13 policy meeting, followed by another rate increase in December, CME Group's FedWatch program showed. But there are more factors that determine the interest rate on a consumer loan.

Investors will be assessing how effective Powell is as a communicator. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

Powell's job is to keep the economy churning without starting a recession during his four-year term - a risk the Fed chair has said he does not see as imminent.

Powell also offered only gentle criticism of Trump's planned tariffs on imported steel and aluminum.

It's also the first Fed meeting since Jerome Powell took over as chairman, although so far Powell hasn't made any major breaks with the policies of predecessor Janet Yellen. But he said the Fed's regional bank presidents around the country have heard concerns from businesses about the consequences of the tariffs. Some economists expected the Fed would signal a fourth hike this year.

On Wednesday, Powell said he will carefully consider the possibility of holding more news conferences but that he had not decided whether to do it.

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