WASHINGTON – The Federal Reserve is raising a key interest rate for the first time in a year, reflecting a resilient U.S. economy and expectations of higher inflation. The move will mean modestly higher rates on some loans.
The Fed’s action Wednesday will mean modestly higher rates on some loans.
The central bank announced after its latest policy meeting that it’s increasing its benchmark rate by a modest quarter-point to a still-low range of 0.5 per cent to 0.75 per cent. The Fed last raised the rate in December 2015 from a record low near zero set during the 2008 financial crisis.
The Fed’s move, only the second rate hike in the past decade, came on a unanimous 10-0 vote. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of stronger growth and a drop in the unemployment rate for November to a nine-year low of 4.6 per cent.
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Its new projection has the unemployment rate dipping to 4.5 per cent by the end of 2017 and remaining at that level in 2018.
The Fed foresees economic growth reaching 1.9 per cent this year, slightly above its forecast in September, and 2.1 per cent in 2017. That’s slightly more optimistic than it projected in September.
The Fed kept its long-term estimate for economic growth at 1.8 per cent, far below the 4 per cent pace that President-elect Donald Trump has said he can achieve with his program of deregulation, tax cuts and increased spending on infrastructure.
The Fed’s estimate that it will raise rates three more times in 2017 is up from an estimate of two increases at the September meeting.
Its policy statement showed only modest changes in wording from the previous meeting. It said “economic activity has been expanding at a moderate pace since mid-year” helped along by solid job growth.
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Trump’s plans for tax cuts and infrastructure spending have led investors to expect that inflation will pick up in coming months.
The economy, after growing at an anemic annual rate of 1.1 per cent in the first half of this year, accelerated to a 3.2 per cent pace in the July-September quarter. That pickup has lifted hopes that the economy will keep rising, fueled by steady hiring gains.
In the month since Trump’s victory, investors have sent stock prices surging to record highs and driven up bond yields. The markets have calculated that Republican control of Congress will enable Trump to cut taxes, ease regulations and accelerate infrastructure spending – and that higher economic growth, inflation and corporate profits will result.
The Fed’s action Wednesday should have little effect on mortgages or auto and student loans. The Fed doesn’t directly affect those rates, at least not in the short run. But rates on some other loans – notably credit cards, home equity loans and adjustable-rate mortgages – will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed’s key rate.
Mortgage rates have been surging since Trump’s election victory last month on expectations that his economic program will accelerate economic growth and inflation.
Some Fed watchers expect faster growth to lead the central bank to shift its focus from trying to energize the economy to considering ways to counter the risk of too-high inflation. On that assumption, some are revising their forecasts for Fed rate hikes in 2017.
Before Trump’s victory, the consensus view of economists was for two Fed rate increases next year. Now, some say they foresee three or possibly as many as four. Others think the Fed will be hesitant to step up the pace of rate hikes. For one thing, Trump’s economic program still must win congressional approval and could undergo significant change along the way.
Last month after Trump’s election, Fed Chair Janet Yellen told a congressional committee that Fed officials would be monitoring Congress’ actions and “updating our economic outlook as the policy landscape becomes clearer.”
Other Fed officials have endorsed that wait-and-see approach.
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