U.S. Federal Reserve hikes key rate for second time in three months
WASHINGTON — The U.S. Federal Reserve has raised its benchmark interest rate for the second time in three months and signalled that further hikes this year will be gradual. The move reflects a consistently solid U.S. economy and will likely mean higher rates on some consumer and business loans.
The Fed’s key short-term rate is rising by a quarter point to a stilllow 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.
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, cast the dissenting vote. The statement said Kashkari preferred to leave rates unchanged.
The Fed’s forecast for future hikes, drawn from the views of 17 officials, 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 President Donald Trump has said he can produce with his economic program.
Stock prices rose and bond yields fell as traders reacted to the Fed’s plans to raise rates gradually. About an hour after the decision was announced at 2 p.m., the Dow Jones industrial average, which had been modestly positive earlier, was up 107 points.
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 — a step that would lead eventually to higher loan rates for consumers and businesses — was enough to move global markets.
But now, the economy is widely considered sturdy enough to handle modestly higher loan rates.
And while the broadest gauge of the economy’s health — the gross domestic product — remains well below levels associated with a healthy economy, many analysts say they’re optimistic that Trump’s economic plans will accelerate growth. His proposals have lifted the confidence of business executives and offset concerns that investors might otherwise have had about the effects of Fed rate increases.
Yet for the same reason, some observers caution that if Trump’s program fails to survive Congress intact, concerns will arise that the president’s plans won’t deliver much economic punch. Investors may start to fret about how steadily higher Fed rates will raise the cost of borrowing and slow spending by consumers and businesses.