US Fed hikes interest rate after one-year pause, faster pace ahead

A Chinese clerk counts US dollar and renminbi banknotes at a bank in Huaibei city, East China's Anhui province, Jan 22, 2015. [Photo/IC]

WASHINGTON - US Federal Reserve on Wednesday raised the benchmark interest rate by 25 basis points, the first and only time in 2016, and indicated a faster rate hike pace next year.

"In view of realized and expected labor market conditions and inflation, the (Federal Open Market) Committee decided to raise the target range for the federal funds rate to 1/2 to 3/4 percent", said the Fed in a statement after concluding a two-day policy meeting.

Confidence in economy

The moderate economic expansion, continued strengthening of labor market and the improvement in inflation condition supported the central bank to raise interest rate after nearly a one-year pause, according to the statement.

"Our decision to raise rates is - certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy has proven to be remarkably resilient," said Fed chair Janet Yellen at a press conference on Wednesday.

The US economy expanded at an annual rate of 3.2 percent in the third quarter of this year, higher than the second quarter growth of 1.4 percent, driven by strong consumer spending; the job market continued strengthening and the unemployment rate fell to 4.6 percent in November, the lowest level since 2007; and the inflation has increased since earlier this year, with core inflation rate rising to 1.7 percent in October.

According to economic projections released on Wednesday, Fed officials expected the US economy to grow 1.9 percent this year and 2.1 percent next year, both up one percentage point from their September' s forecasts.

In December last year, the US central bank increased the interest rate for the first time in nearly a decade. However, a slowdown in global economy since the start of this year and low inflation condition have made Fed policymakers cautious and hold off on any further rate hikes for seven consecutive meetings this year.

According to Wednesday's statement, Fed officials assessed that "near-term risks to the economic outlook appear roughly balanced" , but reiterated that they will continue to closely monitor inflation indications and global economic and financial developments.

Uncertainty clouding future rate path

Following the election of Donald Trump as the next US President, US stock market has been hitting record highs on the expectation of Trump's tax policies and infrastructure investment plan.

All Fed officials "recognize that there is considerable uncertainty about how economic policies may change, and what it might do and how the Fed might have to react," said Yellen in response to Trump' s economic plans.

She warned that fiscal policy is not obviously needed to provide stimulus to help the economy get back to full employment, as the unemployment rate has fallen to pre-recession low level, and the degree of slack in the labor market is diminished.

However, Yellen emphasized that the central bank will factor fiscal policies, along with other things, such as global conditions and oil prices, into economic outlook and figure out appropriate monetary policy.

According to the economic projections, the central bank forecasts three rate hikes next year, while in its September projections, Fed officials expected only two rate hikes in 2017.

The slight upward adjustment of forecast reflected Fed officials' consideration of the falling unemployment rate, Yellen said. She also mentioned that some officials incorporated some assumption of a change in fiscal policy into their projections.

But she stressed that "we are operating under a cloud of uncertainty at the moment and we have time to wait to see what changes occur and to factor those into our decision-making as we attain greater clarity."