14 Jun 2018

US Federal Reserve raises rates

2:50 pm on 14 June 2018

The United States Federal Reserve has raised interest rates for the second time this year and signalled two more hikes this year as it moves ahead of New Zealand's rates.

Traders work on the floor of the New York Stock Exchange for Tuesday trading.

Traders work on the floor of the New York Stock Exchange for Tuesday trading. Photo: AFP / 2018 Getty Images

The benchmark federal fund rate has been raised by quarter of a percentage point to 2 percent, as the Fed painted a picture of a US economy in good shape but needing a steady pace of rate rises over the next couple of years.

"The main takeaway is that the economy is doing very well," Fed chair Jerome Powell said.

"We think that returning rates to a more normal level gradually as the economy strengthens is the best way the Fed can sustain an environment in which American households and businesses can thrive."

The Fed forecast another two rate rises this year and three each for 2019 and 2020.

"The Fed has been proceeding in a very cautious, measured fashion ... (and) given the fact we haven't seen rapid changes, slow and steady is winning the race now," said New York based economic adviser Spencer Levy of CBRE.

The latest rise took the benchmark Fed rate above the RBNZ's official cash rate (OCR) for the first time. The OCR is currently 1.75 percent and is expected to stay there at least until the middle of next year.

The US dollar gained after the statement and shares fell modestly.

ANZ Bank senior strategist Phil Borkin said US interest rates could be well ahead of New Zealand by the time the Reserve Bank got around to raising rates here, probably in the second half of next year.

"That would be a factor that is constraining the New Zealand dollar, interest rate differentials are an important factor in currencies."

A weaker New Zealand dollar would mean increased import costs and feed through into inflation pressures, which eventually would mean higher local interest rates, he said.

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