Fed raises interest rates, sets stage for more increases in 2018

By Elliot Bullman

The Federal Reserve's top policy-making body on Wednesday pulled the trigger on another interest rate hike, setting the stage for a series of increases next year as the economy continues its steady growth.

After a two-day meeting, the Fed raised the target range of the federal funds rate on Wednesday from 1% to 1.25%, the third consecutive quarterly increase. The move follows a record run of jobs growth in the US that has driven the unemployment rate down to its lowest level in 16 years.

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The Fed also predicted stronger economic growth over the next three years. It forecast 2.5 percent growth in GDP in 2018, well above its previous forecast of 2.1 percent growth in 2018, which was published in September.

But over the longer term, the central bank still expects economic growth to hover around 2 percent, rather than the sustained 3 percent that President Donald Trump is aiming for.

In another sign of confidence in the economy, the Fed said it expected to make three further increases in rates next year, unchanged from its previous forecast.

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But that likely does not fully factor in the effects of the $1.5 trillion tax cut Republicans are moving through Congress. Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the central bank to raise rates more aggressively.

More generally, the central bank faces a balancing act next year. If it raises rates too quickly, without being warranted by strong growth, it could strangle the economy.

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But leaving rates low could spur out-of-control inflation. Or it could spark financial stability concerns by encouraging financial institutions to make riskier investments to turn a profit, since they earn less interest on loans.

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