Fed raises key in­ter­est rate, fore­casts three hikes in next year.

Fore­sees three more rate hikes in 2017

The Washington Times Daily - - FRONT PAGE - BY MARTIN CRUTSINGER

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.

The cen­tral bank an­nounced 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 stronger growth and a drop in the un­em­ploy­ment rate for Novem­ber to a nine-year low of 4.6 per­cent.

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.

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 Mr. Trump’s spend­ing plan — the kind of fis­cal sup­port that both Ms. Yellen and her pre­de­ces­sor, Ben Ber­nanke, had called for in the past.

Ms. 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,” Ms. Yellen said.

The Fed chair stressed that she was not pro­vid­ing ad­vice or guid­ance to the in­com­ing Trump ad­min­is­tra­tion.

She also down­played any ex­pec­ta­tions that Mr. Trump’s eco­nomic pro­gram could lead to faster rate hikes as a re­sult of from higher growth and in­fla­tion.

The me­dian pro­jec­tions the Fed is­sued af­ter its meet­ing in­di­cated that Fed of­fi­cials ex­pect three rate hikes in 2017, up from two in­creases in the fed­eral funds rate in their prior quar­terly pro­jec­tions.

Ms. Yellen at­trib­uted the higher num­ber of es­ti­mated rate hikes to the 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 Mr. 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.”

AS­SO­CI­ATED PRESS

Fed­eral Re­serve Board Chair Janet Yellen an­nounced the Fed is rais­ing a key in­ter­est rate for the first time in a year, re­flect­ing a re­silient U.S. econ­omy and ex­pec­ta­tions of higher in­fla­tion. The move will mean mod­estly higher rates on some loans.

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