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US Fed raises key interest rate amid stronger growth outlook

US Fed raises key interest rate amid stronger growth outlook

US Fed raises key interest rate amid stronger growth outlook

Federal Reserve trudges interest rate to top most level as fiscal policy has become more invigorating.

Asian stocks turned in a mixed performance on Thursday after the Federal Reserve announced its widely anticipated decision to raise interest rates by 25 basis points and projected three rate hikes in 2018, citing a strong outlook for USA economic growth. On the other hand, the unemployment rate projection was lowered.

The move opens up the range of interest rates paid by major central Banks: ECB 0%; Bank of England 0.5%; Bank of Japan -0.1%; Bank of Canada 1.25%; Reserve Bank of Australia 1.5%. The Fed tightened policy three times a year ago.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the recession. The Fed expects inflation, which has run below its 2 percent target for six years, to stay at 1.9 percent this year and then rise to 2 percent in 2019.

"For every 100-basis-point increase in the fed funds rate, historically, it has been the case that the adjustable-rate mortgage rate would go up by 70 basis points", said Michael Cox, founding director of the O'Neil Center for Global Markets and Freedom at Southern Methodist University in Dallas, Texas.

Although returns on U.S. dollar assets will rise, markets viewed this rate increase as expected and the United States dollar weakened on market disappointment over the likelihood there would not be a faster pace of monetary tightening this year. While the FOMC raised its projection for economic growth and expects the unemployment rate to come down further, it kept its inflation projection unchanged for the current year and next year.

And indeed, the Fed now sees the median estimate for economic growth this year rising higher to 2.7 percent.

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In his first press conference as Fed chief, Jerome Powell said "there is no sense in the data that we are on the cusp of an acceleration of inflation".

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

The Federal Reserve on Wednesday raised the key lending rate for the first time this year to its highest level in a decade, citing a stronger outlook for USA economic growth. The London Interbank Offered Rate, which is the rate at which worldwide banks lend to each other and serves as a benchmark for lending rates, has risen for more than 30 consecutive sessions and is at its highest since the financial crisis. In December, it raised this rate to between 1.25% and 1.5%.

Concern about a trade war between the world's two largest economies also rattled commodity markets.

The FedWatch tool showed Wall Street expectations for a move in rates are more than 80% at the following meeting on June 13.

"Variable rate debt is where you are most susceptible as interest rates rise", Bankrate analyst Greg McBride recently told CNBC.

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