How Fed rate hike will impact India?

How Fed rate hike will impact India?

Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook.

As expected the US Federal reserve lifted its key interest rate - its first rate rise under new chair Jay Powell by 0.25% to 1.50% to $1.75%, sending Wall Street higher.

The committee, in its release, said the "stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation".

The median estimate for economic growth this year rose to 2.7% from 2.5% in December, signaling confidence in US consumers despite recent weak readings on retail sales that have pushed down tracking estimates of first-quarter activity.

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The 25 basis points increase to the Federal Fund Rate takes the U.S. central bank's target range to between 1.5 per cent and 1.75 per cent.

The Fed said it expects to increase rates twice more this year. The higher rates are likely to be welcomed by savers but not by borrowers, who will face more expensive loan terms. "The likelihood of strong wage growth and an increase in overall economic activity linked to a late-cycle fiscal boost from the federal government should broaden the distribution of economic benefits in a manner that was not apparent early in the business cycle". Officials raised their median estimates for economic growth this year to 2.7 percent, up from 2.5 percent in December. The vote to increase the rate Wednesday was a unanimous 8-0.

February 2018 brought a national unemployment rate of 4.1 percent, a 17-year floor, making the streak continue for its fifth consecutive month. Yellen gave the Feds a reality-check during her three years as chairman.

By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion, he said. Therefore, inflation should move up closer to 2 percent (the medium term target) as the base effect fades away.

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Analysts are divided on exactly how many increases will occur this year.

'This may indicate that the Fed believes there is more slack in the economy as the unemployment rate shows and/or the structural deflation forces, including demographics and technology destruction, remain in place, ' he added.

Unusually low inflation, combined with slow economic growth, helps explain why the Fed has steadily reduced its "longer run" fed funds target since 2012.

"There is no sense in the data that we are on the cusp of an acceleration of inflation", Powell told reporters on Wednesday in Washington.

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In December, the Fed predicted USA gross domestic product (GDP) to grow 2.5 percent this year, 2.1 percent in 2019 and two percent in 2020.

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