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US Federal Reserve hikes interest rates again

Ben Chu
The new Federal Reserve chair Jerome Powell took office in February: AP

The US central bank raised interest rates again on Wednesday, reflecting the continued robust growth and rising inflation in the world’s largest economy.

The Federal Reserve voted to increase the cost of borrowing by 0.25 per cent to between 1.75 and 2 per cent.

The move had been universally expected by financial markets.

“The labour market has continued to strengthen ... economic activity has been rising at a solid rate....Household spending has picked up while business fixed investment has continued to grow strongly,” said the Fed’s statement in the wake of its two-day meeting.

It also dropped its longstanding pledge to keep rates low enough to stimulate the economy “for some time”.

The Fed has now raised rates seven times since late 2015. Its latest projections signal a total of four hikes this year, implying a further two over the next six months, followed by a further three in 2019.

The Labour Department reported in Tuesday that consumer price inflation in the US hit 2.8 per cent in May, the fastest rate since February 2012.

And the Bureau of Labour Statistics reported earlier this month that the US jobless rate hit 3.8 per cent in May, the lowest since April 2000.

“The US economy is firing on all cylinders, small business confidence is at 35-year highs and the Fed now has to guard against the dangers of overheating,” said Richard Carter of Quilter Cheviot.

“The Fed’s path of gradual rate hikes and slow sheet reduction seems well established,” said Aaron Anderson of Fisher Investments.

The trajectory of US inflation or the broader US economy would likely need to change materially for the [Federal Open Market Committee] to deviate from that path. But US economic data has been remarkably steady. Recent developments in Italy, Argentina, Turkey, Brazil and elsewhere aren’t severe enough to force the Fed’s hand.”