Will a quarter point increase in US Fed rates impact India?

Sean Reid
April 7, 2018

Wednesday's rate hike is the sixth time the Fed has lifted interest rates since the economy collapsed in 2008.

Indeed, the Fed's policy statement noted that "the economic outlook has strengthened in recent months ... labor market conditions will remain strong" and annual inflation "is expected to move up in coming months and to stabilize around the Committee's 2% objective over the medium term". The dollar has been stuck in a trading range as investors wait to see whether the Fed will forecast four rate increases this year, instead of the median three seen in December's quarterly forecast.

If the Fed does stick with its new forecast for three rate increases this year and three in 2019, its key policy rate would stand at 3.4 per cent after five years of credit tightening.

Documents issued by the central bank show that its monetary policy committee has a strong consensus for at least two more rate hikes this year, with growing sentiment that the rate could approach 2.5% by the end of 2018.

For as long as anyone's counting - maybe not historians, but you know what I mean - most countries' economies have been fueled and secured by currencies backed by governments' internal banks.

"We have seen moderate increases in wages and price inflation, and we seem to be seeing more of that".

The committee is now forecasting GDP growth of 2.7% for this year, up from 2.5% and GDP growth of 2.4% in 2019, up from 2.1%.

The Fed began to raise rates in December of 2015, after dropping them to extraordinarily low levels in response to the Great Recession.

According to the Washington Post, "Americans should expect even faster growth and lower unemployment ahead, Fed officials said".

The Fed raised the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.5 percent to 1.75 percent. "Interest rates that the Fed directly controls-the federal funds rate-were raised three times in 2017". Fed officials also increased their expectations for GDP growth in 2019 to 2.4% from 2.1% in December past year.

In addition to raising rates, the Fed upgraded its economic forecast, and hint that the path of rate hikes could be more aggressive. They also predicted slightly lower unemployment by the end of this year.

"This gradual process has been underway for more than two years".

The Fed now expects economic growth to accelerate faster this year to 2.7 percent.

At his news conference, Powell was asked about the economic effects of tariffs being imposed by the Trump administration.

"We are trying to take the middle ground here", Powell stated, adding that there are no signs that the economy is on the cusp of accelerating inflation. Wednesday's forecast put the Fed long-term rate - the point at which its policies are neither boosting the economy nor holding it back - at 2.9 per cent.

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