Asian shares down on Fed hike, Sino-US trade anxiety

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

The Federal Reserve has raised its benchmark interest rate for the second time this year and signaled that it may step up its pace of rate increases because of solid usa economic growth and rising inflation.

This hike, which was widely expected, is the Fed's second of 2018, and the central bank signalled it is likely to do two more increases by the end of this year.

The federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, now stands at a range of 1.75% to 2%. The Fed's new forecast showed inflation inching up only slightly over the next 2 1/2 years.

The federal government drastically upgraded its forecasted 2018 economic outlook Wednesday, saying the USA economy was rising at a "solid" rate; an increase from its previous prediction of "moderate" growth. "Economic activity has been rising at a solid rate".

Growth is also expected to stay close to nearly 3 percent of GDP through the year, and Fed officials are eager to prevent the economy from overheating.

So-called core inflation - which excludes volatile items like energy and housing - is now 2.2 percent, around the level the Fed is looking for.

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It was the Fed's seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year. That reflects the fact that the United States recovery after the crisis has been stronger, and inflation is getting closer to the Fed's target. That compares with March's forecasts for 3.8 per cent this year and 3.6 per cent in the following two years.

The use of the terms "symmetric" and "medium term" is a clear indication the Fed is not in a hurry to get inflation to 2 per cent, and will be comfortable if prices rise above that level for a short time. The jobless rate is already the lowest since 2000.

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.

The consumer price index was up 2.8 percent from a year ago as of May according to Bureau of Labor Statistics numbers released on Tuesday.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.25 percent in early trade. They signaled previously that they wouldn't overreact if inflation overshot the target, but they haven't said how much of an overshoot they will tolerate, or for how long. It also forecast an even lower unemployment rate of 3.5% for 2019 and 2020. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally nearing the Fed's target level.

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