Fed ups the ante with rate hike
Wall Street cheers quarter-point rise, third in 15 months
“The simple message is — the economy is doing well.” Federal Reserve Chair Janet Yellen
Don’t look now, but nearly eight years after the Great Recession ended, it’s starting to feel like a normal economy again, at least judging by the Federal Reserve’s second interest rate hike in three months.
Citing increasing inflation, the Fed on Wednesday raised its benchmark short-term rate by a quarter percentage point to a range of 0.75% to 1% and stuck to its forecast of two more such increases this year and three in 2018. Some economists had expected Fed policymakers to modestly step up the pace.
Wall Street cheered the Fed’s decision but reacted with restraint. The Dow Jones industrial average rose 113 points, or 0.5%, to 20,950. “The market got everything it wanted,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. The Fed “signaled the economy is doing better but reaffirmed the pace of (rate hikes) will be gradual.”
The move is expected to filter through the economy, pushing up rates slightly for everything from mortgages and car loans to credit card debt and bank savings accounts.
“The simple message is — the economy is doing well,” Federal Reserve Chair Janet Yellen said at a news conference. “The unemployment rate has moved way down, and many more people are feeling more optimistic about their labor prospects.”
The Fed’s rate hike Wednesday is likely to have the biggest and most rapid effect on shortterm interest rates for auto loans and credit cards, exerting a lesser impact on longer-term loans such a 30-year mortgages.
With the Fed more confident that inflation is moving higher, “It’s now going to switch to a more regular, more predictable path of rate hikes,” says Ken Matheny, senior economist at Macroeconomic Advisers.
By historical standards, the new rate is very low and the projected increases are gradual. But they represent a veritable sprint based on recent experience and come amid a dwindling supply of available workers and accelerating wage growth.
Those developments are raising concerns among some economists that the Fed is at some risk of falling behind an eventual surge in inflation.
The central bank hadn’t lifted its key rate since 2006 — a year that featured four quarterpoint hikes — until it acted in December 2015, and then it waited until this past December to move again amid a variety of global and domestic headwinds. Now, it’s on a roll.
The Fed left its forecast for the federal funds rate unchanged, projecting two more quarter-point increases in 2017 and three next year, based on policymakers’ median estimate. By the end of 2019, the rate is projected to be at its long-run level of 3%.
In a statement after a twoday meeting, the Fed acknowledged “inflation has increased in recent quarters, moving close to (the Fed’s) 2% longer run objective.”
Policymakers maintained their 2.1% growth forecast for this year but slightly raised the projection to 2.1% from 2% for 2018. They expect the 4.7% unemployment to fall to 4.5% by the end of the year and stay at that level through 2019.