Fed Hikes Interest Rates for Second Time in Decade
The Federal Open Market Committee agreed unanimously Wednesday to raise the federal funds rate by 25 basis points, a move that was widely anticipated by markets. The committee's expectations for interest rates in 2017, however, were more varied.
Six members expected three rate hikes next year, with another four anticipating only two. Two other members said they thought that only one additional increase would be warranted in 2017, while the remaining four members anticipated a more aggressive policy, with year-end rates between 1.625% and 2.125%. Thirteen of the 17 members said they expect the longer-run rate to settle between 2.75% and 3%.
The committee also decided to continue to reinvest principal payments on agency debt and mortgage-backed securities and to roll over its maturing Treasury securities "until normalization of the level of the federal funds rate is well under way."
The FOMC's revised economic projections were generally improved over the September forecasts, with unemployment estimated down to 4.7% from 4.8% and GDP growth up from 1.8% to 1.9%. The committee also revised its estimates for personal consumption expenditure inflation to 1.5% from 1.3% — a highly anticipated indicator that Yellen and other FOMC members have said is a major precondition for raising rates. Core inflation — that is, inflation figures that control for food and energy prices — remained at 1.7%.
Federal Reserve Chair Janet Yellen said that, though unemployment remains low and inflation figures have risen closer to the 2% target rate, the committee remains convinced that accommodative economic policy is necessary.
"In light of the current shortfall of inflation from 2%, the committee will carefully monitor actual and expected progress toward its inflation goal," Yellen said. "The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run."
The rate hike was widely anticipated in the marketplace. During the September FOMC meeting three members dissented from the majority opinion to keep target rates at 0.25-0.5% — an unusually high number. Following the election of Donald Trump to the presidency and his fellow Republicans to majorities in both houses of Congress, stock markets have reach new highs, further raising expectations that the Fed might seek to cool markets down to stave off rapid inflation.