It’s walking a delicate balance: Higher interest rates make borrowing more expensive, which can slow corporate profits and economic growth, but one of the worst-case scenarios for the economy would be if inflation raced higher because the Federal Reserve was too slow to raise rates. A quarter-point increase in the federal funds rate target range to 0.5 per cent-0.75 per cent has already been priced in by the markets, so the focus will be firmly on what happens to policy in 2017 and beyond. The Fed kept its long-term estimate for economic growth at 1.8 percent, far below the 4 percent pace that President-elect Donald Trump has said he can achieve with his program of deregulation, tax cuts and increased spending on infrastructure. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 percent. “The Fed rate hike was in the ballpark, but the outlook is hawkish with three hikes in 2017 against previous estimate of two, which has put pressure on domestic market and rupee,” said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.
The Federal Reserve System raises the benchmark interest rate in the United States to a level between 0.5 and 0.75%. This is the second time in a decade that the Federal Reserve has increased interest rates.