Why Does the Fed Keep Hiking Interest Rates?


"The economic outlook has strengthened in recent months", the Fed said in a statement following its two-day Federal Open Market Committee meeting.

The Federal Reserve is raising its key interest rate and signaling confidence in the USA economy's durability but plans to continue a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell.

Federal Reserve Bank of Atlanta President Raphael Bostic said Friday the economy is facing upside risks to activity over coming years, and that's why he's supportive of pressing forward with interest rate rises.

The median estimate for economic growth this year rose to 2.7% from 2.5% in December, signaling confidence in USA consumers despite recent weak readings on retail sales that have pushed down tracking estimates of first-quarter activity. Officials announced that this year's forecast remains at 1.9 percent for both core and headline inflation, while 2019 is predicted bring an increase to 2.1 percent for core personal consumption expenditures.

What's more, seven of the 15 participants on the Fed's policymaking arm favored four rate hikes in 2018, compared to just four members at the end of 2017. He began his membership on the Federal Reserve Board in 2012, so he understands what Yellen was trying to do even though he thought interest rates were lower than they should be. His basic message was that the fiscal policies will continue to improve economic growth without an outsize increase in inflation.

The committee is now forecasting GDP growth of 2.7% for this year, up from 2.5% and GDP growth of 2.4% in 2019, up from 2.1%.

What does the hike mean for mortgage rates? "Job gains have been strong in recent months, and the unemployment rate has stayed low", it said in a post-meeting statement.

Some analysts say a short-term economic stimulus from Congress - in the form of a $1.5 trillion tax cut and federal spending increases - could eventually push the Fed to add a fourth rate move. The Fed tightened policy three times past year. The fed funds rate, for example, topped out at 5.25% at the height of the last economic expansion from 2001 to 2007. Policymakers predict the unemployment rate to fall to 3.8 per cent this year and 3.6 per cent next year. The Fed also outstandingly augments its prediction for USA growth the two successive years.

For years after the financial crisis, the Fed raised rates slowly to keep the economy humming.

"This gradual process has been underway for more than two years".

"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%".

"At the same time, we want to avoid inflation running persistently below our objective, which could leave us with less scope to counter an economic downturn in the future".