Fed­eral Re­serve raises key in­ter­est rate

Rate rises quar­ter-point; two ad­di­tional in­creases are fore­cast for this year.

Austin American-Statesman - - FRONT PAGE -

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.


Fed­eral Re­serve Board Chair Janet Yellen


Fed­eral Re­serve Board Chair Janet Yellen speaks Wed­nes­day af­ter the Fed meeting. The Fed’s key short­term rate is ris­ing a quar­ter-point to a range of 0.75 to 1 per­cent. The cen­tral bank said a strength­en­ing job mar­ket and ris­ing prices had moved it closer to job and in­fla­tion tar­gets.

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