US central bank raises interest rates to 1.75%

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The US central bank has raised interest rates again for the world’s largest economy, citing a tightening labour market.

The Federal Reserve’s governing council, led by new chair Jerome Powell, voted to increae the cost of borrowing from 1.5 per cent to 1.75 per cent.

“The labour market has continued to strengthen and…economic activity has been rising at a moderate rate” the Fed said in its statement.

“Job gains have been strong in recent months, and the unemployment rate has stayed low.”

The move was widely expected in financial markets and the reaction of the dollar and US government bond yields to the announcement was fairly muted.

“It was a fairly straightforward decision for Powell to take action and raise interest rates. The US economy seems to be in somewhat of a sweet spot, with a synchronised global economy, a weaker dollar, fiscal expansion and the prospect of increased business investment all supportive of growth,” said Nancy Curtin, chief investment officer at Close Brothers Asset Management.

The median forecast among Fed officials for the number of 2018 rate rises was three, unchanged from previously.

However, the officials also raised their GDP forecasts for this year and next, with the median rising to 2.7 per cent for 2018 (from 2.5 per cent previously) and 2.4 per cent in 2019 (from 2.1 per cent before). 

“Markets have responded to this rate hike with a muted tone, an indication that this move was priced into the market. However, despite the fact that the Fed is moving far more cautiously than in previous rate hike cycles, a substantial risk remains that markets will eventually be deflated by the series of rate hikes that the Fed has signalled is coming our way,” said  Octavio Marenzi of the consultancy Opimas.