Fed inches up key interest rate
WASHINGTON — A slowly improving economy and the possibility of higher inflation from President-elect Donald Trump’s proposed policies led Federal Reserve officials on Wednesday to hike interest rates for the first time in a year and signal three more small increases for 2017.
Although Trump’s plans — including business tax cuts and increased federal spending on defense and infrastructure — might have influenced the projections for the central bank’s benchmark rate next year, Fed Chair Janet Yellen said she and her colleagues “are operating under a cloud of uncertainty at the moment.”
She said they will have to see what proposals are put into law before taking action.
Fed officials have been hesitant to increase the federal funds rate too quickly out of concern it could cause the still-recovering economy to stumble. Wednesday’s hike of a quarter percentage point, approved unanimously, was just the second increase in more than a decade.
“It is a vote of confidence in the economy,” Yellen said at a news conference.
Financial analysts said the rate hikes should filter down in the form of higher loan rates and interest on savings accounts. Consumers and businesses have already seen borrowing costs climb, a sign that investors expect stronger economic growth and rising inflation.
Yields on the benchmark 10-year U.S. Treasury note have risen to their highest levels in more than a year. The yield on the 10-year Treasury note has climbed from 1.57 percent on Sept. 1 to 2.57 percent on Wednesday.
That has driven mortgage rates to new highs as well. The average interest rate on a standard 30-year mortgage jumped from 3.54 percent the week before the election to 4.13 percent at the end of last week, according to government-backed mortgage buyer Freddie Mac.
Some analysts expect rising rates to eventually trickle through to savers as well.
“This single quarter-point move in interest rates will go largely unnoticed at the household level, but coupled with last year’s hike, the cumulative effect could mount quickly if the Fed quickens the pace of rate hikes in 2017,” said Greg McBride, chief financial analyst at Bankrate.com.
Since election day, the Dow Jones industrial average has jumped about 8 percent to record highs. It dropped about 166 points after the Fed announcement and Yellen’s comments before recovering somewhat. The Dow closed down 119 points, or about 0.6 percent, at 19,792.53
The federal funds rate applies to short-term lending between banks, but it has become a benchmark for consumer and business loan rates.
Fed officials had telegraphed the move in recent weeks, so financial markets had already adjusted. Because of that Yellen said she anticipated that “households and firms will see very modest changes from this decision.”
“It could boost very slightly some short-term interest rates that could have an effect on borrowing costs that are linked to them,” she said.
The federal funds rate still is extremely low by historical standards — after Wednesday’s hike it will be between 0.5 percent and 0.75 percent. It was above 5 percent as recently as 2007.