Federal Reserve hikes interest rate to highest level in a decade


The 2.8% uptick in average weekly earnings in the three months to January suggests that wage growth is starting to pick up more substantially, to the benefit of consumers.

The dollar weakened - falling more than half a cent against sterling to hit $1.4130 in the wake of his remarks, as they were seen as more dovish than the markets were expecting. In his first meeting as Fed Chairman, Jerome Powell made a decision to have his cake and eat it, too: He sounds upbeat, tough, and hawkish about next year but cautious about this year.

The initial market focus was on the Fed's near-term policy trajectory, but the takeaway may not be quite so positive once investors digest the more hawkish long-term outlook that hints at concern that there's greater risk of the economy overheating.

Naturally, the positive showing also helped to bolster hopes that the Bank of England (BoE) will raise interest rates again in May, shoring up demand for the Pound (GBP) once again.

When mortgage payments go up and credit card interest rates spike, something else in the family budget has to give. The central bank raised rates modestly three times in 2017 under Powell's predecessor, Janet Yellen, whom he succeeded last month.

Federal Reserve officials met for the first time under new Fed Chairman Jerome Powell this week. Officials raised their median estimates for economic growth this year to 2.7 percent, up from 2.5 percent in December. The Fed's GDP projection for the year seems to be headed for an upward revision.

The Fed is set to announce its first interest rate increase of the year, a testament to the continued strength of the economy and of the job market in particular. The Fed had been gradually reducing its estimate of the long-run neutral fed funds rate since it began publishing its calculations in January 2012. Contrary to many analysts' expectations, they did not change their forecast of three rate hikes this year.

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The median estimate for economic growth this year rose to 2.7 per cent from 2.5 per cent in December, signaling confidence in US consumers despite recent weak readings on retail sales that have pushed down tracking estimates of first-quarter activity.

The Fed's key benchmark rate now sits at a still relatively low range of 1.5 to 1.75 per cent.

The Fed's new economic projections released Wednesday show they now expect inflation to rise above their 2% target next year and in 2020. The unemployment rate remained at a 17-year low of 4.1 percent.

"Whenever the Fed says interest rates are going up, (our clients) get a little nervous", he said. The Fed has signaled three rate increases for 2018, but accelerated growth could cause policymakers to add an additional hike. Some now envision an annual growth rate of just 1.7 percent for the quarter. In particular, the Fed has been dead wrong about inflation for the past several years.

However, the statement did not discuss the reasons for the rising growth rate, making no mention of the massive tax cuts the US Congress passed in December, which are expected to juice the economy at least in the short term.

The major US index futures are pointing to a modestly lower opening on Wednesday following the upward move seen in the previous session.

The outcome of the Fed meeting is due at 18.00 GMT (14.00 Eastern Time), so expect some volatility in the Dollar exchange rate complex.

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