U.S. Federal Reserve boosts key interest rate

The Fed's move to boost the target range for the overnight federal funds rate by one-quarter point to between one per cent and 1.25 per cent had been widely expected by the market.

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During a press conference, Fed chair Janet Yellen said that following a first-quarter slowdown, economic activity in the U.S. appears to have rebounded, and the central bank has seen improved household spending and business investment. Exports are also showing greater strength, she said.

The Fed said U.S. job gains remain solid, while inflation is currently running soft — under its long-term target rate of two per cent. 

"Overall, we continue to expect that the economy will continue to expand at a moderate pace over the next few years," Yellen said.

The central bank's open market committee, which sets monetary policy, voted 8-1 in favour of Wednesday's decision.

Another rate hike to come

The Fed also indicated that it will boost rates one more time this year, but gave no indication of when that will happen. The Fed previously hiked the overnight rate by a quarter point back in March.

"We expect the Fed to pay very close [attention] to inflation numbers going forward," TD senior economist Michael Dolega said in a commentary.

"Should the low unemployment begin to generate the anticipated wage and inflation gains, another rate hike is very much a possibility later this year," he said.

Based on the forecasts of individual members of the open market committee, the Fed is expected to boost overnight rate three times in 2018 and three times in 2019, pushing the interest rate up to three per cent. That is the level the Fed considers to be neutral, neither stimulating the economy nor holding it back.

Trimming balance sheet

The central bank also said it plans to begin trimming its holdings of bonds later this year, "provided that the economy evolves broadly as anticipated."

The Fed has a portfolio of about $4.5 trillion US in treasury and mortgage bonds, which it started buying during the financial crisis to bolster economic growth. 

Asked by a journalist if she has talked with the White House about staying on for a second four-year term as Fed chair, Yellen reiterated her previous comment that she plans to serve out her current term, which ends in early February.

Yellen said she hasn't had any conversations with President Donald Trump about staying for a second term.