Federal Reserve Raises Interest Rate


 

On Wednesday following the Federal Open Market Committee’s two-day meeting, the Federal Reserve announced the third increase in interest rates this year; citing an expectation of faster growth and lower unemployment next year as the US economy strengthens. As expected, the benchmark interest rate rose a quarter point to a range of 1.25 percent to 1.5 percent. The rate is tied to a variety of debt instruments, including credit cards and adjustable-rate mortgages. The decision was backed by all committee members minus Chicago and Minneapolis  Fed President’s Charles Evans and Neel Kashkari who had preferred to leave rates as they were.

Policy makers pointed to the low unemployment rate, which they expect to fall to 3.9 percent next year, and the increased spending by households for justification of the tax hike.

“This change highlights that the committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers and rising wages,” Chairwomen Janet Yellen told reporters Wednesday in Washington.

In another notable development, the committee collectively raised its GDP estimate from 2.1 percent in September to 2.5 percent;  also estimating that the fourth quarter could reach the 3 percent level as well. This change in GDP estimate follows two consecutive quarters of 3 percent growth or higher. The committee made no mention as to why they expected growth to accelerate, though Yellen has said that she and her colleagues expect a “modest lift” of economic growth from the tax cuts being proposed by President Donald Trump and other Republican legislators.

While the Federal Reserve envisions a burst of growth, and continued low interest rates, some have expressed concern in the lack of movement on inflation. Chairwomen Yellen, who will be leaving in February, has said the persistent shortfall of inflation from their 2 percent goal is a major piece of “undone work”. Top Fed officials have been unable to explain why inflation, which is the rate that the general level of prices for goods and services is rising, has fallen short of the Fed’s established 2 percent goal. The 2 percent line is what the Fed considers healthy for the US economy. When inflation is too low, it can potentially hurt the economy as businesses become weary about investing in people and equipment. Currently, US inflation rates hover around the 1.6-1.7 percent range.

In November, President Trump nominated Fed governor Jerome Powell to replace Yellen when she ends her four-year term in the beginning February.  It’s largely expected that Powell will stick to similar style of governance to that of Yellen, who was named to the post by former President Obama. Powell will be joined by several new Fed board members who will also be chosen by President Donald Trump. Some analysts have predicted Powell and the new board members will adopt a looser approach to their regulation of the banking system.

After the release of the Fed’s policy statement, US stocks extended their gains while Treasury yields dropped to session lows.

As of January, the Fed said it would raise the amount of Treasury bonds and mortgage-backed securities that it would not reinvest into on a monthly basis to $12 billion and $8 billion; consistent with its balance sheet reduction plan. Also foreseen is three additional rate hikes in 2018 and two hikes in 2019.

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