Fed hikes as 'dot plot' shifts upwards

Fed hikes as 'dot plot' shifts upwards

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

"We expect the prospect of a trade war between the USA and other economies to put a floor under gold prices in the short term but ultimately we think that Fed tightening will prove too strong a headwind", Capital Economics analyst Simona Gambarini told the Reuters Global Metals Forum.

Members of the Federal Open Markets Committee, which votes on rates, predicted the USA economy will grow by 2.7% this year, faster than the 2.5% predicted in December.

The U.S. Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening. And it increased its estimate for rate hikes in 2019 from two to three, reflecting more optimistic expectations for growth and low unemployment.

Wednesday's rate hike came as no surprise as the new chairman recently indicated the Fed would go ahead with interest rate hikes despite the market turmoil. This year's estimated United States economic growth was revised up to 2.7 per cent from an earlier forecast of 2.5 per cent.

New US Federal Reserve chair Jerome Powell fronted up to the press early Thursday morning Australia time to deliver a widely anticipated rate hike - the sixth since the Fed began lifting rates in December 2015.

"I think they will end up tightening four times this year, but they don't have to signal that yet", said Jim O'Sullivan, chief USA economist at High Frequency Economics. Wednesday's action was approved 8-0, with the Fed avoiding any dissents at the first meeting Powell has presided over as chairman since succeeding Janet Yellen last month.

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How does the Fed increase interest rates?

"History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride".

The unemployment rate, which was 4.1 percent in February, is projected to decline to 3.6 percent by the end of 2019.

The Fed statement said monetary policy continues to provide stimulus to the economy, and repeated that even with "further gradual adjustments ... economic activity will expand at a moderate pace".

"The tight labor market will hurry-along the Fed to raise rates", Yun said. They raised their estimate for growth in 2019 to 2.4 percent, up from 2.1 percent.

Bringing forward interest rate rises means that the market is bracing for a surge in the dollar exchange rate.

The benchmark Nikkei 225 index was up a fraction by 0.05 percent, or 10.96 points, to 21,391.93 in early trade, while the broader Topix index edged down 0.16 percent, or 2.67 points, at 1,713.62. There were also concerns over a potential global trade war with the recent tariffs implemented by the Trump administration.