U.S. Federal Reserve nudges up interest rates again, expects more to come

The U.S. Federal Reserve continued its gradual pace of interest rate increases on Wednesday, bumping up a key rate by 0.25 of a percentage point and signalling there are more hikes to come.

The Fed's key benchmark rate now sits at a still relatively low range of 1.5 to 1.75 per cent. 

Wednesday's increase marked the first one of the year, following three hikes in 2017. Since it began bumping up rates back in 2015, the Fed has now made six increases.

Speaking to reporters, new Fed chair Jerome Powell, who succeeded Janet Yellen in February, said the gradual tightening of monetary policy "should continue to serve the economy well."

The U.S. central bank is also holding to the outlook it gave in December that it will boost rates three times in total this year. However, it boosted its 2019 estimate from two rate hikes to three.

"The guidance in terms of the future rate hikes is a touch more hawkish than originally expected. 2019 looks like we're going to get a faster pace of rate hikes," said Matt Miskin, market strategist at John Hancock Investments.

"This a new Fed chairman starting with a bit of a hawkish tone as he takes leadership."

In announcing its decision, the Fed's policy-setting open market committee said that since it met in January the U.S. job market has continued to strengthen and economic activity has been rising moderately.

"The economic outlook has strengthened in recent months," the Fed said in a release. "The committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and [labour] market conditions will remain strong."

The Fed said it sees inflation currently running below its stated target of two per cent, although it does expect inflation will rise in the coming months toward that goal.

The latest bump up in interest rates will mean higher U.S. borrowing costs for consumers and businesses. 

In a new economic update that accompanied the rate announcement, the Fed raised its estimate for U.S. growth this year to 2.7 per cent, up from 2.5 per cent in its December projection. It also sees growth of 2.4 per cent in 2019, up from 2.1 per cent. 

The U.S. unemployment rate, which currently sits at 4.1 percent — a 17-year low — is projected by the Fed to ease to 3.8 per cent at the end of the year, and dip further to 3.6 per cent at the end of 2019.
 
Karl Schamotta, director of global product and market strategy at Cambridge Global Payments, said in a release that  with fiscal stimulus and reduced slack in the labour market "raising the risk of an overheat in the economy," a move toward four rate hikes this year "within the next few meetings seems increasingly possible."