Interest Rates Increased
Sending signals loud and clearThe Federal Reserve has left little doubt that it will raise interest rates Wednesday (3.15.2017) for the third time since December 2015 to reflect a consistently solid U.S economy. The rate increase will likely go down as one of the most telegraphed ever, given that several Fed officials, including Chair Janet Yellen, each let it be known over the past two weeks that they felt it was time to raise the Fed's benchmark short-term rate. The thinking was that the Fed would want to see whether President Donald Trump's ambitious economic program of tax cuts, deregulation and higher spending on the military and infrastructure could pass Congress — and then assess how it might affect the economy. Now, the guessing switches to how many times the Fed may raise rates during 2017 — whether three times, as the market now expects, or perhaps as many as four. Yet regardless of the answer, the market seems far less nervous about the prospect of rate increases than it was in recent years. Investors seem increasingly confident that the U.S. economy is vigorous enough to withstand modestly higher borrowing rates.
Wednesday March 15th 2017
After its two-day policy meeting, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation.
There was one dissent. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voted against raising interest rates. The Fed’s statement did not provide a reason for Mr. Kashkari’s vote
“In view of realized and expected labor market conditions and inflation, the Committee decided to raise…the fed funds rate,” the central bank wrote in its statement.
The Fed’s cautious, yet generally positive, economic statement follows a slew of improving data, including better-than-expected ISM manufacturing growth, strong consumer confidence reports and solid payroll gains. The unemployment rate has hovered around 5% for the past year—a level many economists consider to be near full employment.
In its statement, the Fed noted that inflation is “moving close to the Committee’s 2 percent longer-run objective,” but that “excluding food and energy prices, inflation was little changed and continued to run somewhat below 2 percent.”
Consumers and businesses will feel it — maybe not immediately, but over time.
Fed projections and dot plots
The Fed’s expectations for GDP growth increased slightly to 2.1% in 2018, while forecasts for unemployment remained mostly the same, with officials expecting the rate to fall to 4.5% by 2019. Officials raised their short-term outlook for core PCE inflation to 1.9% this year.
While projections for the federal funds rate rose across the board, the total number of expected rate hikes in 2017 remained unchanged with three quarter-point raises. In December, Fed officials raised their forecasts for the pace of rate hikes after the election of Donald Trump, which sent inflation expectations surging.
Officials also forecast three rate hikes in 2018, with the rate reaching its long-run goal of 3.0% in 2019.
An increased number of Fed officials are expecting to raise rates at least twice more this year.
Only three of the 17 officials who submitted forecasts now expect the central bank to move more slowly. There was a similar coalescing around tighter policy for the following two years, although the median prediction of a 3 percent funds rate by the end of 2019 remained unchanged.
The rate hike will increase the upward pressure on interest rates that consumers pay, but the immediate effect is likely to be modest. People with credit card debt are likely to see an immediate increase of about a quarter percentage point in their interest rates. The effect on longer-term loans is less direct, but the average rate on a 30-year mortgage rose by half a percentage point over the last year.