The US Fed hikes and more are on the way

The Federal Reserve announced Wednesday that it raised its benchmark interest rate after a two-day policy meeting, as widely expected.

The Federal Open Markets Committee projected two more rate hikes this year, unchanged from its prior estimate of three in 2017. Only one member of the FOMC — the Minneapolis Fed’s Neel Kashkari — voted against a rate hike.

The FOMC raised the benchmark federal funds rate by 25 basis points to a range of 0.75%-1%, marking its third increase since the Great Recession. This hike will eventually trickle down to increase borrowing costs for short-term loans and credit cards.

“Unlike the first two rate hikes where there were 12 months in between, here we are just three months later and the Fed’s raising rates again,” said Greg McBride, the chief financial analyst at

Credit card owners and people with home-equity lines of credit can expect to see an increase in rates within 60 days, he told Business Insider.

Convincing markets

Just one month ago, market participants believed the Fed would skip the March meeting and perhaps go in June. However, several officials including Chair Janet Yellen made comments that gradually convinced markets that the Fed was ready.

The Fed is raising rates as further acknowledgement that job gains remain “solid” and inflation would rise to its 2% target, the statement said.

Last Friday, the better-than-forecast February jobs report showed a rebound in wages and manufacturing-sector investment, cementing market expectations for a rate hike.

The Fed also had its eye on financial markets. From the election through Wednesday’s statement, the benchmark S&P 500 index gained 11%, as investors anticipated that President Donald Trump’s agenda would stimulate business growth.

The relative calmness in markets likely factored into the Fed’s belief that another interest rate increase is appropriate.

“If the Fed is raising rates into a stronger environment, the stronger environment is far more important than rates going up 25 basis points,” said Jamie Dimon, the CEO of JPMorgan, during the Business Roundtable’s media briefing on Tuesday. For the Fed, “the ‘why’ is more important than the ‘what,'” he said.

Here’s the full Fed statement:

Information received since the Federal Open Market Committee met in February indicates that the labour market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2 per cent longer-run objective; excluding energy and food prices, inflation was little changed and continued to run 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 expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labour market conditions will strengthen somewhat further, and inflation will stabilise around 2 per cent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

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 3/4 to 1 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, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

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; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

More to come …

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