Federal Reserve Chairman Jerome Powell (Photo Credit : Fed's official Twitter account)

JAKARTA (TheInsiderStories)The Federal Reserve has decided to raise its benchmark interest rate by a quarter-point, showing confidence that the U.S. economy is on the positive trend. The Fed also signalled at there could still be more hikes this year.

At its Federal Open Market Committee (FOMC) meeting on Wednesday, the first policy meeting under new Fed Chief Jerome Powell, the U.S. central bank raised the interest rate target range by 0.25 per cent to a new band of 1.5-1.75 per cent. This move puts the effective Fed funds rate at around 1.63 per cent, the highest since September 2008.

The Fed made the decision after considering the realized and expected labour market conditions and inflation. “The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 percent inflation,” the Fed said in a statement published on its website.

“This decision marks another step in the ongoing process of gradually scaling back monetary policy accommodation–a process that has been under way for several
years now,” Fed Chief Powell said at a press conference after the FOMC meeting.

Powell said the labour market has continued to strengthen and that economic activity has been rising at a moderate rate. The U.S. job gains averaged 240,000 per month over the past three months, well above the pace needed in the longer run to absorb new entrants into the labor force. The unemployment rate remained low in February at 4.1 percent, while the labor force participation rate moved higher.

“Over the past four years, the participation rate has remained roughly unchanged. That’s a sign of improvement, given that the aging of our population is putting downward pressure on the participation rate, and we expect that the job market will remain strong,” Powell said.

“Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings,” he added.

On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 per cent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, it said.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months,” Powell said.

It also signalled further hikes this year.

“The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong,” he said.

However, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation.

This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“In making our policy decisions over the next few years, we will continue to aim for
inflation of 2 per cent while sustaining the economic expansion and a strong labour market. In the Committee’s view, further gradual increases in the federal funds rate will best promote these goals,” Powell said.

“By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion. At the same time, we want to avoid inflation running persistently below our objective, which could leave us with less scope to counter an economic downturn in the future,” he added.

 

The Committee, he said, will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal.

The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

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.

Powell is a former lawyer with a background in finance and banking and becomes the first non-economist to chair the Fed since the 1970s. (*)

Written by Roffie Kurniawan, email: roffien@theinsiderstories.com

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