Federal Reserve raises key interest rate
Rate rises quarter-point; two additional increases are forecast for this year.
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 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 to 1 percent. 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 ultra-low borrowing rates and is healthy enough to withstand steadily tighter credit.
The decision, issued after the Fed’s latest policy meeting, 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, drawn from the views of 17 officials, still projects that it will raise rates three times this year, unchanged from the previous forecast in December. But the number of Fed officials who think three rate hikes will be appropriate for 2017 rose from six to nine.
The central bank’s outlook for the economy changed little, with officials expecting growth of 2.1 percent this year and next year before slipping to 1.9 percent in 2019. Those forecasts are far below the 4 percent growth that 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 cen- tral 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, noted that the Fed’s statement provided little hint of the tim- ing 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.”
Stock prices rose a nd bond yields fell as traders reacted to the Fed’s plans to raise rates gradually. The Dow Jones industrial aver- age, which had been only modestly positive before the decision was announced at 2 p.m. Eastern time, closed up 112 points.
The Fed’s statement made few changes from the last one issued Feb. 1. But it did note that inflation, after lag- ging at worrisomely low levels for years, has picked up and was moving near the Fed’s 2 percent target.
Many economists think the next hike will occur no earlier than June, given that the Fed probably wants time to assess the likelihood that Congress will pass Trump’s ambitious program of tax cuts, deregulation and increased spend-
ing 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 sustain- ing a stock market rally on the belief that the economy will remain durable and cor- porate profits strong.
A robust February jobs report — 235,000 added jobs, solid pay gains and a dip in the unemployment rate to 4.7 percent — added to the perception that the econ- omy 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.