Us federal reserve raises key interest rate for first time in year

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THE US Federal Reserve has raised interest rates by a quarter point and signalled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 per cent and 0.75 per cent.

In view of realised and expected labour market conditions and inflation, the committee decided to raise the target range, the central banks policy-setting committee said in its unanimous statement after a two-day meeting.

Job gains have been solid in recent months and the unemployment rate has declined, the Fed said, noting that market-based measures of inflation compensation had moved up considerably.

More significant was a fresh batch of Fed policymaker forecasts that indicated the current once-a-year pace of rate increases will accelerate next year.

Fed Chair Janet Yellen is scheduled to hold a press conference shortly to elaborate on the decision.

With President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Feds two per cent target.

The Feds median outlook for rates rose to three quarter-point increases in 2017 from two as of September.

That would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run normal three per cent.

That normal level is slightly higher from three months ago, a sign that the Fed feels the economy is still gaining traction.

The Fed continued to describe that pace as gradual, keeping policy still slightly loose and supporting some further improvement in the job market.

It sees unemployment falling to 4.5 per cent next year and remaining at that level, which is considered to be close to full employment.

US bond yields had already begun moving higher following the election and as expectations of the Fed rate increase solidified.

By the start of this week, trading in fed funds futures assigned a greater than 95 per cent likelihood to a rate hike, according to data compiled by the CME Group.

All 120 economists in a recent Reuters poll had expected a rate hike today.

Federal Reserve hikes Fed Funds Range by 25bps to 0.50% to 0.75% as expected, 3 hikes for 2017 vs 2 prev. #Fed dots are hawkish. pic.twitter.com/WEKAm6ZKbH

In the weeks following Trumps November 8 victory, Fed policymakers have said his proposals could push the economy into a higher gear in the short run. Even though the details of the Republican businessmans plans remain uncertain, Wednesdays statement marked a rare case in the post-crisis era in which the Fed moved its interest rate outlook higher.

Risks to the outlook remain roughly balanced between factors that could slow or accelerate the economy beyond what the central bank anticipates, the Fed said, no change from the November assessment.

The rate increase was the first since last December and only the second since the 2007-2009 financial crisis, when the Fed cut rates to near zero and deployed other tools such as massive bond purchases to stabilise the economy.