The Federal Reserve on Wednesday said it decided to raise interest rates, signalling that it believes the economy is healthy enough to withstand tighter financial conditions.
It raised the target range of the federal funds rate by 25 basis points to a range of 1% to 1.25%, a level it hadn’t reached since the financial crisis.
“The quarter-point rate hike that we saw today really will not have a big impact on consumers,” said Chris Gaffney, the president of EverBank World Markets. In theory, this hike should eventually lift borrowing costs on credit cards, loans, and other types of debt.
“You may start to see it weight on consumer confidence in that they believe interest rates would continue to increase, which would make their [borrowing] more expensive.”
The Fed raised rates for the second time since President Donald Trump took office, and it maintained its forecast for one more hike this year.
That’s even though inflation continues to trail its 2% target. The Department of Labour’s monthly consumer price index released earlier Wednesday was weaker than expected, raising speculation that this would be the last rate hike of the year.
“They actually increased their overall growth expectations but inflation is going to lag, and so I think that’s going to be the key,” Gaffney told Business Insider. “If we continue to not see any inflation, we could start to perhaps see it impacting their rate decisions going forward.”
The Fed was rosier about the other part of its mandate — the labour market — amid a 4.3% unemployment rate. The Fed noted that “job gains have moderated” but remained solid.
The lack of strong wage inflation, however, is another sign for the doves, including Neel Kashkari, the Minneapolis Fed president who voted against the decision, that the Fed should not be eager to raise rates.
To shrink its nearly $US5 trillion balance sheet, the Fed plans to gradually allow a fixed amount of the assets it owns to roll off, meaning it won’t reinvest them. The Fed amassed bonds after the financial crisis to help keep interest rates low.
Initially, up to $US6 billion in Treasurys and $US4 billion in mortgage-backed securities will be allowed to roll off monthly.
These caps will be raised every three months until they hit $US30 billion for Treasurys and $US20 billion for mortgage-backed securities. There was no indication of when this process would begin.
Here’s the Fed statement:
Information received since the Federal Open Market Committee met in May indicates that the labour market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures 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 continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labour market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term but to stabilise around the Committee’s 2 per cent objective over the medium term. Near term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realised and expected labour market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-1/4 per cent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to 2 per cent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated. This program, which would gradually reduce the Federal Reserve’s securities holdings by decreasing reinvestment of principal payments from those securities, is described in the accompanying addendum to the Committee’s Policy Normalization Principles and Plans.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; and Jerome H. Powell. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.