Fed signals hike in interest rates coming soon
Central bank’s leader indicates improving economy means higher interest rates sooner than expected
The Federal Reserve is poised to raise its benchmark interest rate in mid-March, significantly sooner than investors had expected, as it moves to keep pace with a wave of economic optimism that started with the election of President Trump.
The Federal Reserve is poised to raise its benchmark interest rate in mid-March, significantly sooner than investors had expected, as it moves to keep pace with a wave of economic optimism that started with the election of President Trump.
In an unusually clear statement about a pending decision, the Fed chairwoman, Janet Yellen, said on Friday in Chicago that the central bank was likely to act at its next policymaking meeting — barring any unpleasant economic surprises.
Yellen added that the Fed still expected to raise rates twice more later in the year, which she said would bring the benchmark rate close to a level that the Fed regards as
neutral, with low rates no longer providing an inducement for borrowing and risk-taking. That outlook signals that an end is finally in sight for the Fed’s economic stimulus campaign, devised during the depths of the financial crisis more than eight years ago.
Asked whether Fed officials were delivering a coordinated message, Fischer responded wryly, “If there has been a conscious effort, I’m about to join it.”
The impending rate increase could heighten tensions with the White House, which wants to stimulate growth by cutting taxes, reducing regulation and increasing defense and infrastructure spending. Fed officials have concluded the economy is already growing at something close to the maximum sustainable pace, meaning faster growth should be offset by faster rate increases.
Financial markets, however, are taking the prospect of higher rates in stride. The Standard & Poor’s 500-stock index, which is up more than 11 percent since Election Day, ended trading on Friday mostly flat.
The prospective Fed move has modest shortterm implications for consumers. Interest rates on car loans and some kinds of credit card debt will tick upward, but remain at low levels by historical standards. Rates on 30-year mortgages are up by about half a percentage point over the past year.
The broader consequences depend on the Fed’s ability to raise interest rates without slowing economic growth. The Fed’s goal is to return rates to a level that neither encourages nor impedes economic activity. Over the past century, however, most of the central bank’s attempts to strike that balance have ended in economic recessions.
The American economy is in the midst of one of the longest expansions in the nation’s history, but it is also one of the weakest. The economy expanded by 1.6 percent in 2016, compared with 2.6 percent in 2015, according to the government’s most recent estimate.
Fed officials have concluded, however, that monetary policy cannot deliver faster growth. The Fed’s job is to minimize unemployment and moderate inflation.
The unemployment rate, at 4.8 percent in January, is in a range Fed officials regard as healthy, and prices rose 1.9 percent in the 12 months ending in January, the closest the Fed has come since 2012 to hitting its target of 2 percent annual inflation.
In December, the Fed raised its benchmark rate for just the second time since the financial crisis, to a range of 0.5 percent to 0.75 percent, and predicted three increases in 2017.
At the beginning of the week, however, Wall Street analysts and investors did not expect the Fed to raise rates again any earlier than June. T
Now, after a week of discussions, analysts regard a March increase as highly likely.
Yellen pointed to an improvement in the global context. “The prospects for further moderate economic growth look encouraging, particularly as risks emanating from abroad appear to have receded somewhat,” she said.
The shift in the Fed’s language over the last week also may reflect a recognition that market expectations were not keeping pace with the Fed’s evolving view of the economy. Yellen, in a February appearance before Congress, hinted that the Fed might be providing a little too much stimulus, describing the Fed’s policy as “accommodative.”
But at the start of this week, investors still put a low probability on a March increase.
Markets are wary of the Fed’s flirtations with interest rate increases, as the central bank in recent years has often found reasons for last-minute postponements.
This time, the Fed chose to overwhelm any lingering doubts.
“At our meeting later this month,” Yellen said, “the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
The committee is scheduled to meet in Washington on March 14 and 15.