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Fed raises interest rates as faster growth predicted

Fed raises interest rates as faster growth predicted

 

The US Federal Reserve has pushed interest rates up and predicted the economy will grow at a faster pace than previously expected.

The target for the bank's benchmark rate was increased by 0.25 per cent, to a range of between 2 per cent and 2.25 per cent.

A majority of members of the central bank's Federal Open Markets Committee have predicted another rate rise before the end of the year.

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But Philip Smeaton, chief investment officer at Sanlam UK, said there were uncertainties about the health of the US economy.

He said growth has been boosted by tax cuts and high levels of government spending, which should generate more inflation in the economy. The impact of this will either be higher inflation, as a result of the economic stimulus, or lower growth, as the effect of the stimulus wears off.

Mr Smeaton said: "Uncertainty remains around whether President Trump’s trade wars will inflict harm on the US economy, and how business will react as the fiscal stimulus wears off, but in the meantime the inflationary pressures may force the Fed to tighten more than they want to in 2019."

The rate rise did not come as a surprise for markets and the dollar actually fell in the immediate aftermath, despite the Fed saying it expected growth to be 3.1 per cent in 2018, compared with the previous estimate of 2.8 per cent.

The central bank added it expected US growth to be 2.5 per cent in 2019.

Kathleen Brooks, research director at Capital Index, said the central bank might actually be too pessimistic on US growth for this year, given the rates in the first three quarter of 2018.

Simon Evan-Cook, multi asset investment manager at Premier has shunned US equities throughout the year and said this has had a somewhat negative impact on the performance of his funds, but concerns about the valuation of the US market meant he was persisting with the policy of preferring other markets.