Federal Reserve bumps up USA interest rate, signals two more in 2018

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(Kitco News) - Gold prices are holding steady just below the psychological barrier of $1,300 an ounce after the Federal Reserve suggested that it will hike interest rates more aggressively this year and the next as the US economy continues to grow.

The central bank raised its key short-term rate by a modest quarter-point to a still-low range of 1.75 per cent to 2 per cent.

The Fed expects inflation to overshoot its target faster than it previously thought, prompting it to raise its forecast for rate hikes this year.

"With a rate hike nearly fully priced in, the focus is on how many times the Fed will raise rates this year and next and how much beyond the levels it considers as neutral to the economy, or what they call the longer-run rates", said Shuji Shirota, head of macro economic strategy group at HSBC Securities in Tokyo.

Here's the Fed's full statement: "Information received since the Federal Open Market Committee met in May indicates that the labour market has continued to strengthen and that economic activity has been rising at a solid rate". The unemployment rate is seen falling to 3.6% in 2018, compared to the 3.8% forecast in March.

The Fed now foresees four rate hikes this year, up from the three it had previously forecast.

Two additional rate hikes are predicted this year, for a total of four.

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Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000. That reflects the fact that the United States recovery after the crisis has been stronger, and inflation is getting closer to the Fed's target.

Fed officials project gross domestic product increasing 2.8 percent this year, up from an earlier projection of 2.7 percent.

This will raise borrowing costs for credit cards, auto financing, mortgages, and other loans, but help savers earn more interest on their deposits. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded.

USA central bankers again emphasized on Wednesday that the goal is "symmetric", and they said in minutes of the May meeting that "a temporary period of inflation modestly above 2 per cent" would help anchor long-run inflation expectations around the target.

USA interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation.

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