Fed raises interest rate a quarter of a point
Interest rates are going up.
The Fed raised rates as expected on Wednesday in its first meeting under Chairman Jerome Powell. The central bank’s decision was a response to a sunnier economic outlook, very low unemployment and rising wages.
“The economic outlook has strengthened in recent months,” the Fed said in a statement following its two-day Federal Open Market Committee meeting. “Job gains have been strong in recent months, and the unemployment rate has stayed low.”
The Fed raised the federal funds rate, which helps determine rates for mortgages, credit cards and other borrowing, to a range of 1.5% to 1.75%. That was an increase of a quarter of a percentage point. Rates are still historically low.
The central bank stuck to its plans for three interest rate hikes this year. But it shifted its plans for next year, calling for three more rate hikes instead of two.
Stocks rallied after the announcement. The Dow was up about 200 points.
Fed officials were split on whether this week’s policy meeting was the appropriate time to signal a fourth rate hike in 2018.
Recent comments by top Fed officials about the country’s bright economic outlook had raised investor expectations that the Fed would accelerate rate increases to keep the economy from overheating.
Central bankers did offer hints that they may raise rates a fourth time later this year as a result of faster global growth, stronger business investment and massive tax cuts.
The Fed now expects economic growth to accelerate faster this year to 2.7%. At the December meeting, Fed officials estimated 2.5% economic growth this year ahead of the passage of Republican tax cuts and plans to increase government spending.
Earlier this month, Powell told lawmakers the economy was “strong” and tax cuts would add “meaningfully to growth.”
Policy makers also maintained their inflation outlook of 1.9%, slightly below the Fed’s target.
The unanimous decision on Wednesday’s rate hike signals to Wall Street that Powell, for the time being, will stick with his precedessor Janet Yellen’s plans for gradual rate increases.
The policy move leaves central bankers with room to assess whether they will need to raise rates faster to prevent the economy from overheating.
For years after the financial crisis, the Fed raised rates slowly to keep the economy humming. But a recent $1.5 trillion tax cut and $300 billion spending bill, along with an improved economic outlook, have more recently changed that calculus.
Wednesday’s rate hike is the sixth time the Fed has lifted interest rates since the economy collapsed in 2008.
Powell’s job is to keep the economy churning without starting a recession during his four-year term — a risk the Fed chair has said he does not see as imminent.
If the Fed raises rates too slowly, the economy could overheat. Tighten too quickly and inflation may not meet its target of 2% — the level the Fed sees as healthy for the economy.
The Fed’s preferred gauge of inflation stands at 1.5%. But central bankers expect it to “move up” this year, and data show it was already “a little bit higher” by the end of last year.