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Fed Raises Interest Rates for Second Time this Year

Stephen Stanley chief economist at Amherst Pierpont and Bob Browne Northern Trust CIO discuss the

The Fed was widely expected to raise interest rates Wednesday amid strong economic data.

The decision to raise rates comes as the USA unemployment rate hovers at 3.8% - the lowest rate in almost two decades - and inflation, which lagged the Fed's 2% target for years, shows signs of starting to pick up.

United States monetary policy and its rate structure is setting it apart from most of the rest of the developed world in a fashion that will impose pressure on economies that may be more fragile than they might previously have been regarded in an ultra-low global rates environment. The Fed previously nudged rates up in March.

Officials left their estimate of the longer-run natural rate at 4.5 percent on Wednesday, suggesting that they see a job market that's running warm.

Two additional rate hikes are predicted this year, for a total of four.

Economists generally expect growth to remain above 3 percent through year end, while Fed policymakers raised their forecast a touch to 2.8 percent on Wednesday.

Fed officials project gross domestic product increasing 2.8 percent this year, up from an earlier projection of 2.7 percent. Over the near term, however, inflation may exceed the Fed's target level thanks to rising oil prices.

The use of the term "symmetric" and "medium term" is a clear indication the Fed is not in a hurry to get inflation to two percent and will be comfortable if prices rise above that level for a short time. Payrolls growth accelerated from an average monthly increase of 182,000 in 2017 to 207,000 a month in 2018 so far. "This is a rare occurrence where the chairperson can help influence and shape the overall dot plot message", Ruskin, the global head of G10 FX strategy, said in a preview. "We're not waiting for inflation to show up, we're - we're going ahead and moving gradually and trying to navigate between two risks really".

The clear and precise communication signaled the central bank's confidence about US' current economic growth.

The US rate hikes are already sending threatening ripples through other economies as capital flows towards the US and the US dollar strengthens. The Fed is raising rates gradually to keep the economy in check.

The statement retained language in place since late 2015 saying "policy remains accommodative".

The 3-month SIBOR has hovered at 1.41 per cent since May. As such, we can expect a reasonably choppier conditions for U.S. fixed income markets. Crude reached a two week high despite the Energy Information Administration (EIA) publishing a report that shows USA oil production is on the rise. "But that's not what we think will happen".

Follow Treasury yields in real time here. "I would put it down as more of a risk".

The rally in the U.S. equity market entered its tenth year in 2018.

"Economic activity has been rising at a solid rate", the FOMC said in its statement.

The dollar index, which measures the greenback against a basket of currencies, fell 0.24 percent, with the euro up 0.41 percent to $1.1791.

"In view of realised and expected labour market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 per cent".

Mr Powell called the figures "encouraging" but said the bank wants to see the economy sustain that rate of inflation before it declares victory.

As a result, RBI is compelled to raise its repo rate in response to higher U.S. yields, amid an evidently-tightening dollar liquidity situation.

Eurozone growth is slowing down and rising political uncertainty as evidenced by the formation of the Italian government will give the European Central Bank food for thought. "If we thought that inflation were going to take off, obviously we'd be showing higher rates".

In contrast, high inflation in India is majorly cost-pushed (imported inflation). If they push past that and the job market isn't overheating, it could needlessly choke off growth and tamp down inflation. When the Fed tightens credit, it aims to do so without derailing the economy. But it has finally passed 2%, the level the Fed considers healthy.

"Right now we don't see that in the numbers at all".