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Fed lifts rates amid stronger inflation, drops crisis-era guidance

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The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate above-target inflation at least through 2020.

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The Fed has raised rates seven times since late 2015 on the back of the economy’s continuing expansion and solid job growth, rendering the language of its previous policy statements outdated.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020.

Policymakers projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

They see another three rate increases next year, a pace unchanged from their previous forecast.

“The labor market has continued to strengthen … economic activity has been rising at a solid rate,” the central bank’s rate-setting Federal Open Market Committee said in its unanimous statement after the end of a two-day meeting.

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“Household spending has picked up while business fixed investment has continued to grow strongly,” the Fed said.

U.S. Treasury yields rose after the release of the statement while U.S. stocks were trading marginally lower. The dollar .DXY pared losses against a basket of currencies.

Fed Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT).

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“The Fed’s path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point. The trajectory of U.S. inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path,” said Aaron Anderson, senior vice president of research at Fisher Investments.

The Fed’s short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank’s battle in recent years to return monetary policy to a normal footing.

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Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as “accommodative,” with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

FED CONFIDENCE
The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers’ March projections. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.

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The rate increase was in line with investors’ expectations and showed policymakers’ confidence in the economy’s growth prospects, continued low unemployment and steady inflation. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”

In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves – its chief tool for moderating short-term interest rates – at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

The policy statement bypassed discussion about the tensions over the Trump administration’s trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.

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Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation, but have said they would not change their policies or forecasts until those risks are realized.

Reporting by Howard Schneider; Editing by Paul Simao


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Taliban release two Western hostages in Afghanistan

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The Taliban handed two Western hostages over to US forces in southern Afghanistan Tuesday, three years after they were abducted, in a swap for three high-ranking insurgent prisoners that could boost peace talks.

The exchange of American Kevin King and Australian Timothy Weeks for the militants -- including Anas Haqqani, brother to the Taliban's deputy leader -- was welcomed by both the United States and the insurgents.

US Secretary of State Mike Pompeo said the releases "give us hope for the success of intra-Afghan peace negotiations, which the United States stands ready to support."

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President Volodymyr Zelensky says Ukraine getting ‘tired’ of Trump scandal

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Ukrainian President Volodymyr Zelensky said on Tuesday that his country is "tired" of questions related to the Trump scandal, amid a critical week of public impeachment hearings in Washington.

"We have our country, we have our independence, we have our own problems," he complained after a press conference in Kiev with visiting Czech prime minister Andrej Babis.

Hearings began last week in Washington into whether US President Donald Trump ordered to freeze US military aid to Ukraine in an effort to get Kiev to launch investigations against potential 2020 election rival Joe Biden and his son Hunter.

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Audience breaks into applause as Vindman explains why he’s not afraid of testifying against Trump

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Republican efforts to undermine Lt. Col. Alexander Vindman apparently failed to persuade the audience in the impeachment hearing room.

The National Security Council staffer was showered with applause after reading the closing portions of his opening statement for a second time at the request of Rep. Sean Patrick Maloney (D-NY).

"Can you read the last paragraph for me again, the second-to-last one, can you read that again for me?" Maloney said. "I think the American public deserves to have it again."

Vindman agreed, and said his father would probably appreciate that.

"Dad, my sitting here today in the U.S. Capitol, talking to our elected officials, is proof that you made the right decision 40 years ago to leave the Soviet Union and come here to the United States of America in search of a better life for our family," Vindman said. "Do not worry, I'll be fine for telling the truth."

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