Fed raises key rate, plans to reduce bond holdings
THE UNITED States Federal Reserve has raised its benchmark interest rate for the third time in six months, providing its latest vote of confidence in a slowgrowing but durable economy.
The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.
The increase in the short-term rate by a quarter-point to a still low range of 1 per cent to 1.25 per cent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.
The central bank chose to raise rates again despite an economic slowdown at the start of 2017, which it predicts will prove temporary. It foresees one additional rate hike this year, unchanged from its previous forecast. It gave no hint of when that might occur.
The latest Fed rate hike, announced in a statement after a policy meeting, comes as the US economy is growing only sluggishly. Even so, many of the barometers the Fed monitors most closely have given it the confidence to keep gradually lifting still-low borrowing rates towards their historic norms.
Though it assesses the overall economy, the Fed’s mandates are to maximise employment and stabilise prices. And hiring in the United States remains solid if slowing, with employment at a 16-year-low of 4.3 per cent – even below the level that the Fed associates with full employment.
Inflation has been more problematic, having long stayed below the central bank’s 2 per cent target rate. Recent data have suggested that inflation may even be slowing further. But Fed officials have said they think inflation will soon pick up along with the economy.