The Federal Reserve raised interest rates on Wednesday by 0.25% and forecast at least two more hikes for 2018, signalling growing confidence U.S. tax cuts and government spending will boost the economy and inflation and lead to more aggressive future tightening.
In its first policy meeting under new Fed chief Jerome Powell, the U.S. central bank indicated that inflation should finally move higher after years below its 2 percent target and that the economy had recently gained momentum.
The Fed also raised the estimated longer-term “neutral” rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought.
“The economic outlook has strengthened in recent months,” the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent.
Policymakers were largely split on Wednesday as to whether a total of three or four rate hikes would be needed this year. They predicted rates would rise three times next year and two times in 2020, a further indication of confidence in the economy.
They projected U.S. economic growth of 2.7 percent in 2018, an increase from the 2.5 percent forecast in December, and also marked up growth for next year. The Fed’s preferred measure of inflation was expected to end 2018 at 1.9 percent, unchanged from the previous forecast, but it is seen rising a bit above the Fed’s target next year.
Sterling rose half a percent within reach of a one-month high after data showed British workers’ pay rose at the fastest pace in nearly 2-1/2 years in the three months to January, cementing expectations the central bank will raise interest rates in May.
The Office for National Statistics said workers’ total earnings, including bonuses, rose by an annual 2.8 percent — the biggest increase since the three months to September 2015 — after an upwardly revised 2.7 percent rise in the three months to December.
Before the data release, sterling was up nearly a quarter of a percentage point as the dollar eased. Bond markets give a 70 percent probability of a rate increase by May and an 84 percent chance of two increases by the end of the year. British government bond futures fell more than 30 ticks after the data, pushing two-year government bond yields 5 basis points higher on the day to 0.936 percent, their highest since May 2011.
With long positions in sterling whittled down in recent weeks after hitting a three-year high in late January, more upside room for the currency is likely if the Bank of England adopts a confident stance at Thursday’s meeting.
09.30 – GBP – Retail Sales MoM; Forecast at 0.4% against previous of 0.1%
12.00 – GBP – MPC Official Bank Rate Vote; Forecast the same as previous at 0-0-9
12.00 – GBP – Monetary Policy Summary
12.00 – GBP – Official Bank Rate; Forecast the same as previous at 0.5%