Rate Increased .25% Wednesday with Promises of a Faster Pace of Rate Increases to follow
WASHINGTON, DC — The Federal Reserve raised interest rates Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank’s shift from policies used to battle the 2007-09 financial crisis and recession.
In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy “for some time” and signaled it would tolerate above-target inflation at least through 2020.
Information received since the Federal Open Market Committee (FOMC) met in May indicates that the labor market has continued to strengthen, and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
The Fed has raised rates seven times since late 2015 on the back of the economy’s continuing expansion and solid job growth, rendering the language of its previous policy statements outdated.
Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank’s 2 percent target, hitting 2.1 percent this year and remaining there through 2020.
Policymakers also projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.
They see another three rate increases next year, a pace unchanged from their previous forecast.
The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers’ March projections. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.
The rate increase was in line with investors’ expectations and showed policymakers’ confidence in the economy’s growth prospects, continued low unemployment and steady inflation. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.
The Fed said its policy of further gradual rate increases will be “consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective.”
In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves — its chief tool for moderating short-term interest rates — at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.
“The labor market has continued to strengthen … economic activity has been rising at a solid rate,” the Fed’s rate-setting committee said in unanimous statement after the end of a two-day meeting.
“Household spending has picked up while business fixed investment has continued to grow strongly,” the Fed said.