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US Fed raises key interest rate amid stronger growth outlook

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Washington (AFP)

The Federal Reserve on Wednesday raised the key lending rate for the first time this year, citing a stronger outlook for economic growth, and hinted at a slightly more aggressive pace for hikes in 2019.

Newly-installed Fed Chairman Jerome Powell presided over his first meeting, which raised the federal funds rate to 1.5-1.75 percent.

In its quarterly forecasts, Fed officials project the benchmark interest rate will end this year at 2.1 percent after two more hikes, unchanged from the December forecast, but will rise to 2.9 percent at the close of 2019, signalling three possible hikes.

"The economic outlook has strengthened in recent months," the Fed said in the statement released at the conclusion of the two-day policy meeting, reflecting the unanimous vote to raise rates.

However, the statement did not discuss the reasons for the rising growth rate, making no mention of the massive tax cuts the US Congress passed in December, which are expected to juice the economy at least in the short term.

Powell will have the opportunity to comment -- or not -- on fiscal policy in his first press conference as chairman, due to begin at 2:30 p.m. (1830 GMT).

Markets will be scrutinizing his words for any guidance on the thinking at the central bank.

- Policymakers split -

The quarterly rate forecasts imply an additional rate increase next year than previously expected, even though officials do not anticipate inflation to rise any faster. The Fed's preferred inflation measure is forecast to end this year at 1.9 percent and barely move to 2.0 percent in 2019.

However, the range of estimates for the federal funds rate reveal officials are split almost exactly down the middle with eight expecting no more than three rate hikes this year and seven projecting four moves or more. Only eight of the partcipants voted on policy at this meeting, but all join the discussion.

Central bankers see growth picking up this year and next, with GDP gaining 2.7 percent in 2018 and 2.4 percent in 2019. In addition, the already historically low unemployment is seen falling even further, ending next year at a stunning 3.6 percent, according to the quarterly Summary of Economic Projections.

The Fed statement said monetary policy continues to provide stimulus to the economy, and repeated that even with "further gradual adjustments ... economic activity will expand at a moderate pace."

Central bankers admitted to being befuddled by the absence of inflation last year despite the economic recovery and strong job market, but Wednesday's statement repeated the view that 12-month inflation is expected to move up to the Fed's two percent goal "over the medium term."

A host of factors -- including the massive tax cuts enacted by Congress, a weaker dollar and robust job creation -- are expected to push prices higher, while the tight labor market is likely to drive wages.

First-quarter economic forecasts have dimmed in recent weeks on a batch of mixed economic data, including a widening trade gap, weak sales of housing, autos and durable goods, as well as soft retail and construction spending.

But with very strong jobs markets, record business and consumer sentiment, low unemployment and signs of rising inflation, even dovish Fed officials have indicated their support for tighter monetary policy.

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