Banks Rejoice as Fed Hikes Rate, Raises Economic Outlook

Jerome Powell’s Slightly More Hawkish Policy Stance

"The Fed has more confidence in the economy's underlying momentum and appears to be more determined to normalize interest rates", said Mark Vitner, senior economist at Wells Fargo.

Yet forecasts released by the Fed after it raised rates suggest a growing number of Fed officials want the central bank to start sliding over to the fast lane. The challenge for the central bank is to balance low unemployment with the potential for higher inflation. The Fed expects the U.S. unemployment rate, now at 4.1 per cent, to come down to 3.8 per cent in 2018 and 3.6 per cent in 2019, both revised higher from the December projection of 3.9 per cent in 2018 and 2019.

In view of realized and expected labor market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. Hong Kong's de facto central bank and the People's Bank of China earlier yesterday announced measures to tighten their monetary policy.

Policymakers were largely split on Wednesday as to whether a total of three or four rate hikes would be needed this year.

The latest set of quarterly forecasts forecasts showed that policy makers were divided over the outlook for the benchmark interest rate in 2018.

Additionally, based on the updated economic projections, Fed expects inflation to be at 1.9% this year, near about its target of 2%. Interestingly, core inflation projections have nudged up for the next two years.

The S&P 500 Index of US stocks were higher after Powell spoke, while the yield on 10-year US Treasury notes were around 2.89%, little changed from Tuesday.

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In the wider market, Europe's main share indexes were in the red amid the threat of a global trade war, with Beijing bracing for new tariffs from U.S.

US economic strength is evident with the unemployment rate at a 17-year low and companies receiving windfalls from President Donald Trump's tax cuts, which they may reinvest to create jobs and improve wages.

That mortgage owner could pay an additional $312.50 a month, or $3,750 a year, in interest if the Fed follows through with the three quarter-point hikes that it forecast for 2018 at its December policy meeting.

The Fed said at the conclusion of a two-day policy meeting that the economy continues to strengthen and that it expects to increase rates another two times this year as it pursues a return to more normal interest-rate levels. It will also be interesting to see how the Fed's communication evolves under Powell.

In his news conference, Powell left the door open to more or fewer than three increases this year, depending on economic conditions.

For the sixth - count 'em, six, 6 - time since the worldwide financial crisis of 2008, the Federal Reserve Bank has raised interests. The US is projected to grow at 2.7 per cent in 2018, up from 2.5 per cent projected in December. This year's estimated U.S. economic growth was revised up to 2.7 per cent from an earlier forecast of 2.5 per cent. There have been moderate increases in wages and price inflation, but the Fed is "very alert" to any increases that could result from the very low unemployment rate.

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