Fed­eral Re­serve’s ac­tion a re­sponse to strength­en­ing econ­omy

The Denver Post - - FRONT PAGE - By Martin Crutsinger

wash­ing­ton» The Fed­eral Re­serve has raised a key in­ter­est rate in re­sponse to a strength­en­ing U.S. econ­omy and ex­pec­ta­tions of higher in­fla­tion, and it fore­sees three more rate hikes in 2017.

The Fed’s move will mean mod­estly higher rates on some loans.

Wed­nes­day’s ac­tion sig­naled the Fed’s be­lief that the U.S. econ­omy has im­proved over the past year af­ter a rough start to 2016 and can with­stand slightly higher bor­row­ing rates. Its ex­pec­ta­tion of three rate in­creases in 2017 is up from the two it fore­cast three months ago.

The Fed said in a state­ment af­ter its lat­est pol­icy meet­ing that it’s rais­ing its bench­mark rate by a quar­ter-point to a still-low range of 0.5 per­cent to 0.75 per­cent. The Fed last raised the rate last De­cem­ber from a record low near zero set dur­ing the 2008 fi­nan­cial cri­sis.

The Fed’s move, only the sec­ond rate hike in the past decade, came on a unan­i­mous 10-0 vote. It also re­leased an up­dated eco­nomic fore­cast that showed mod­est changes to its out­look for eco­nomic growth, un­em­ploy­ment and in­fla­tion, mainly to take ac­count of a stronger econ­omy and a drop in the un­em­ploy­ment rate for Novem­ber to a nine-year low of 4.6 per­cent.

James Marple, se­nior econ­o­mist at TDBank, said the Fed’s fore­cast of a third rate in­crease next year was the “only real sur­prise” Wed­nes­day.

“The move up is a sig­nal that the Fed has be­come more confident in the eco­nomic out­look and that in­fla­tion will in­creas­ingly track closer to the 2 per­cent tar­get,” Marple said.

The Fed’s rate hike should have lit­tle ef­fect on mort­gages or auto and stu­dent loans. The cen­tral 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.

“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, Bankrate.com’s

chief fi­nan­cial an­a­lyst.

Af­ter the Fed’s an­nounce­ment, sev­eral ma­jor banks an­nounced that they were rais­ing their prime lend­ing rate from 3.50 per­cent to 3.75 per­cent. The prime rate is a bench­mark for some types of con­sumer loans such as home eq­uity loans. BB&T and Cit­i­group were among the banks to an­nounce the in­crease.

Mort­gage rates have been surg­ing since Don­ald Trump’s pres­i­den­tial vic­tory last month on ex­pec­ta­tions that his pro­gram of dereg­u­la­tion, tax cuts and in­creased spend­ing on in­fra­struc­ture would ac­cel­er­ate eco­nomic growth and in­fla­tion.

At a news con­fer­ence, Fed Chair Janet Yellen said she didn’t think the econ­omy needed stim­u­lus from Trump’s spend­ing plan — the kind of fis­cal sup­port that both Yellen and her Fed pre­de­ces­sor, Ben Ber­nanke, had called for in the past.

Yellen said such poli­cies would be un­likely to max­i­mize em­ploy­ment, since the un­em­ploy­ment rate is now slightly be­low the Fed’s own long-term tar­get.

“I be­lieve my pre­de­ces­sor and I called for fis­cal stim­u­lus when the un­em­ploy­ment rate was sub­stan­tially higher than it is now,” she said.

She stressed she was not pro­vid­ing ad­vice or guid­ance to the in­com­ing Trump ad­min­is­tra­tion. She also down­played any ex­pec­ta­tions that Trump’s eco­nomic pro­gram could lead to faster rate hikes as a re­sult of from higher growth and in­fla­tion.

Yellen at­trib­uted the Fed’s higher num­ber of es­ti­mated rate hikes for 2017 to a lower un­em­ploy­ment rate and pos­si­bly some changes in fed­eral bud­get pol­icy be­gin­ning next year. But she em­pha­sized that any changes to the Fed’s pro­jec­tions were “mod­est.”

“This is a very mod­est ad­just­ment in the path of the fed­eral funds rate,” she said.

The Fed’s new pro­jec­tions have the un­em­ploy­ment rate dip­ping to 4.5 per­cent by the end of 2017 and re­main­ing at that level in 2018. It fore­sees eco­nomic growth reach­ing 1.9 per­cent this year and 2.1 per­cent in 2017.

That’s slightly more op­ti­mistic than the Fed pro­jected in Septem­ber.

The cen­tral bank kept its long-term es­ti­mate for eco­nomic growth at 1.8 per­cent, far be­low the 4 per­cent pace that Trump has said he can achieve with his eco­nomic pro­gram.

Over­all, the Fed’s pol­icy state­ment showed mod­est changes in word­ing from the pre­vi­ous meet­ing. It said “eco­nomic ac­tiv­ity has been ex­pand­ing at a mod­er­ate pace since mid-year” helped along by solid job growth. And it noted that in­fla­tion ex­pec­ta­tions “have moved up con­sid­er­ably but still are low.”

Trump’s plans for tax cuts and in­fra­struc­ture spend­ing have led in­vestors to ex­pect that in­fla­tion will pick up in com­ing months.

The econ­omy, af­ter grow­ing at an ane­mic an­nual rate of 1.1 per­cent in the first half of this year, ac­cel­er­ated to a 3.2 per­cent pace in the July-Septem­ber quar­ter. That pickup has lifted hopes that the econ­omy will keep ris­ing, fu­eled by steady hir­ing gains.

Saul Loeb, AFP/Getty Im­ages

Fed­eral Re­serve Chair Janet Yellen speaks at a news con­fer­ence in Wash­ing­ton, D.C., af­ter Wed­nes­day’s an­nounce­ment that in­ter­est rates will rise.

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