Fed raises rate, expects more hikes
Toronto, New York markets, loonie jump on positive news of improving economy
WASHINGTON The Federal Reserve has raised its benchmark interest rate for the second time in three months and forecast two additional hikes this year. The move reflects a consistently solid U.S. economy and will likely mean higher rates on some U.S. consumer and business loans.
The Fed’s key short-term rate is rising by a quarter-point to a still low range of 0.75 per cent to one per cent. The central bank said in a statement that a strengthening job market and rising prices had moved it closer to its targets for employment and inflation.
The message the Fed sent Wednesday is that nearly eight years after the Great Recession ended, the economy no longer needs the support of ultralow borrowing rates and is healthy enough to withstand steadily tighter credit.
Stock indexes in Toronto and New York surged on the announcement, while the loonie rose nearly a full U.S. cent. In Toronto, the S&P/TSX composite index gained 141.30 points, or nearly one per cent, at 15,520.91, as gold, materials and metals stocks led advancers. The Canadian dollar climbed 0.99 of a U.S. cent at US75.15 cents, amid a softening greenback and higher crude prices.
On Wall Street, the Dow Jones industrial average advanced 112.73 points to 20,950.10, the S&P 500 index rose 19.81 points to 2,385.26, and the Nasdaq composite index added 43.23 points at 5,900.05.
The decision, issued after the Fed’s latest policy meeting ended, was approved 9-1. Neel Kashkari, president of the Fed’s regional bank in Minneapolis, was the dissenting vote. The statement said Kashkari preferred to leave rates unchanged.
The Fed’s forecast for future hikes still projects that it will raise rates three times this year, unchanged from the last forecast in December. But the number of Fed officials who think three rate hikes will be appropriate rose from six to nine.
The central bank’s outlook for the economy changed little, with officials expecting economic growth of 2.1 per cent this year and next year before slipping to 1.9 per cent in 2019. Those forecasts are far below the four per cent growth that U.S. President Donald Trump has said he can produce with his economic program.
The Fed’s rate hike should have little effect on mortgages or auto and student loans. The central bank doesn’t directly affect those rates, at least not in the short run. But rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed’s key rate.
Mark Vitner, an economist at Wells Fargo, said the Fed’s statement provided little hint of the
I think they’re confident, but it’s hard not to be cautious after we’ve had so many shocks over the years.
timing of the next rate hike. The lack of specificity gives the Fed flexibility in case forthcoming elections in Europe or other unseen events disrupt the global economy.
“They don’t want to prematurely set the table for a rate hike,” Vitner said. “I think they’re confident, but it’s hard not to be cautious after we’ve had so many shocks over the years.”
The Fed’s statement made few changes from the last one issued Feb. 1. But it did note that inflation, after lagging at worrisomely low levels for years, has picked up and was moving near the Fed’s two per cent target.
Many economists think the next hike will occur no earlier than June, given that the Fed likely wants time to assess the likelihood that Congress will pass Trump’s ambitious program of tax cuts, deregulation and increased spending on infrastructure.
In recent weeks, investors had seemed unfazed by the possibility that the Fed would raise rates several times in the coming months. Instead, Wall Street has been sustaining a stock market rally on the belief that the economy will remain durable and corporate profits strong.
A robust February jobs report — 235,000 added jobs, solid pay gains and a dip in the unemployment rate to 4.7 per cent — added to the perception that the economy is fundamentally sound.
That the Fed is no longer unsettling investors with the signal of forthcoming rate increases marks a sharp change from the anxiety that prevailed after 2008, when the central bank cut its key rate to a record low and kept it there for seven years. During those years, any slight shift in sentiment about when the Fed might begin raising rates was enough to move global markets.