- The Federal Reserve on Wednesday announced that it raised its benchmark interest rate, as had been widely expected.
- This will raise borrowing costs for credit cards, auto financing, mortgages, and other loans, but help savers earn more interest on their deposits.
- In a notable change to its statement, the Fed removed language indicating that it expected the economy to grow at a pace warranting “gradual” rate increases.
- Fed officials expect to raise rates two more times this year for a total of four hikes; in March, they expected three rate hikes.
The Federal Reserve on Wednesday announced that it decided to raise interest rates, and it signalled plans to do so more times than expected this year.
In a two-day meeting, the Federal Open Market Committee voted to lift the target range for the federal funds rate by 25 basis points to between 1.75% and 2%. In a few hours, several banks will respond by raising their prime lending rate, the starting point of borrowing costs for nonmortgage loans like credit cards and auto loans.
This was the seventh rate hike since late 2015, when the Fed first began lifting interest rates from almost zero. It kept borrowing costs that low after the financial crisis to encourage businesses and consumers to spend and grow the economy.
A decade after the recession, the Fed has made progress on its objectives. The unemployment rate in May was 3.8%, its lowest since 2000, while inflation was just below the Fed’s 2% target.
The Fed expects inflation to overshoot its target faster than it previously thought, prompting it to raise its forecast for rate hikes this year. The updated dot plot, which reflects voting FOMC members’ expectations, showed two more rate hikes this year for a total of four; in March, officials saw three.
“Rising interest rates will start taking a toll on borrowers that are already stretched to the limit with tight household budgets,” said Greg McBride, the chief financial analyst at Bankrate.com. “Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages.”
However, higher rates would help savers earn more interest on their deposits.
Also notable was that the Fed deleted about 80 words of its statement that said it expected the economy to “evolve in a manner that will warrant further gradual increases” in rates.
Fed Chairman Jerome Powell announced during a press conference that he will hold such briefings after every policy meeting instead of quarterly as from January 2019. This would improve the Fed’s communication, Powell said. It would also allow the Fed to be less choreographed and more spontaneous in cutting or raising rates as economic conditions warrant.
“Having twice as many press conferences does not signal anything about the pace or timing of future interest rate changes,” Powell said.
In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation. Even amid concerns about US trade policy, the Fed raised its forecast for gross-domestic-product growth this year to 2.8% from 2.7%. In the longer run, it maintained the forecast for 1.8% growth. That’s weaker than the White House’s forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts.
The Fed anticipates that inflation will overshoot its 2% target this year; in March, officials saw that happening only in 2020.
Here’s the Fed’s full 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 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 per cent. 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 labour market conditions, and inflation near the Committee’s symmetric 2 per cent objective over the medium term. Risks to the economic outlook appear roughly balanced.
“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 1-3/4 to 2 per cent. The stance of monetary policy remains accommodative, thereby supporting strong 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 maximum employment objective and its symmetric 2 per cent inflation objective. 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.
“Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.”