Fed raises rates, sees more coming
Americans likely to see increase in bank savings
WASHINGTON – The economy is revving up, and so the Federal Reserve is stepping up its plan to move interest rates closer to normal.
As anticipated, the Fed raised its benchmark short-term interest rate Wednesday but it also upgraded its forecast from a total of three hikes this year to four amid an improving economy, falling unemployment and slightly stronger inflation.
The move is expected to cascade through the economy, in particular nudging up rates for variable-rate consumer loans such as credit cards and adjustable-rate mortgages.
It’s also likely to push up bank savings rates for Americans, especially seniors, who are finally realizing higher returns on CDs, bonds and other fixed-income assets after years of meager yields.
“The main takeaway is the economy is doing very well,” Fed Chairman Jerome Powell said at a news conference. “Most people who want to find jobs are finding them.”
The central bank lifted its federal fund rate – what banks charge each other for overnight loans – by a quarter percentage point to a range of 1.75 percent to 2 percent. That’s within shouting distance of its longer-run forecast of 2.9 percent. It’s the second rate hike this year and the seventh since the Fed began bumping up rates amid an improving economy in late 2015.
For years after the Great Recession of 2007 to 2009, the Fed kept its key rate near zero to stimulate sluggish growth.
In perhaps a telling sign, the Fed removed its previous assertion that its key rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run.” That suggests the Fed could push up rates more rapidly. Powell, however, said it simply means rates are getting closer to normal levels.
The reaction in financial markets to the Fed’s latest move was relatively muted Wednesday, although stocks and bond prices fell.
❚ How fast rates will rise: The big question ahead of Wednesday’s meeting was whether the Fed would keep its forecast for three quarter-point increases this year or bump it up to four. It raised it to four but maintained its projection of three more hikes in 2019.
The Fed expects its key rate to rise to 2.4 percent at the end of the year, up from its prior estimate of 2.1 percent, reckoning unemployment will fall a bit faster than it previously thought and inflation will kick up a bit more, according to its median forecast. Eight of 15 officials now expect four hikes, up from seven in March.
It now expects the rate will be 3.1 percent at the end of 2019, up from its previous projection of 2.9 percent. The forecast indicates Fed policymakers expect federal tax cuts and spending increases to juice growth.
❚ The economy: The Fed predicts the economy will grow 2.8 percent this year, up from its March forecast of 2.7 percent, and it maintained its 2.4 percent estimate for 2019.
“Economic activity has been rising and a solid rate,” the Fed said in a statement after a two-day meeting.
The economy grew at a 2.2 percent annual rate in the first quarter, in line with its modest average throughout the 9-year-old economic expansion. But growth is expected to pick up to about 4 percent in the current quarter and average close to 3 percent this year.
Jobs: The Fed estimates the 3.8 percent unemployment rate will fall to 3.6 percent by the end of the year and 3.5 percent by the end of 2019, below its March forecast of 3.6 percent. “Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the statement said.
❚ Inflation: Inflation has picked up and Fed policymakers are looking for a slightly faster gain that leaves annual consumer price increases slightly above the Fed’s 2 percent target.
“The main takeaway is the economy is doing very well,” Fed Chairman Jerome Powell said.