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Fed Raises Interest Rates, Signals 2 More Hikes This Year

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Federal Reserve raises interest rates

Federal Reserve Chair Jerome "Jay" Powell said job gains are boosting income and confidence, while foreign expansion and tax cuts support additional growth.

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy. The rate is estimated to fall 3.5% next year, through to 2020, down from the previous forecast of 3.6%.

Fed says raises interest on excess reserves rate to 1.95 pct from 1.75 pct.

The so-called " dot plot" released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March.

In its updated forecasts, the Fed envisions stronger growth this year, with the economy expanding 2.8 percent, up from the 2.7 percent it predicted in March.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said before the Fed made its announcement that policymakers are "scared of future inflation risk". It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020. Should the Fed's expectations prove accurate, its rate policy would then be meant to slow the economy.

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U.S. unemployment dropped to 3.8% in May, its lowest level since April 2000 and one of the lowest levels since the second world war.

The bank's preferred indicator of inflation, consumer spending figures, showed annual inflation rose 2% in April or 1.8% if energy and food were excluded. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group. After years in which the economy expanded at roughly a tepid 2 percent annually, growth could top 3 percent this year. Not since 1969 has the jobless rate been lower.

Fed officials have begun to debate publicly how close the economy is to overheating.

The economic expansion has survived for nine years and is now the second-longest in history.

U.S. interest rates are set to rise further and faster than previously planned as surging economic growth forces officials to do more to try to see off the threat of inflation. The average rate for a 30-year fixed mortgage hit a high of 4.8 percent in the last week of may before dropping slightly.

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