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March 17, 2017

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Fed raises key rate for 2nd time in 3 months, sees 2 more hikes

Source: AP | March 17, 2017, Friday | Print Edition

THE US Federal Reserve has raised its benchmark interest rate for the second time in three months and forecast two additional hikes this year. The move reflects a consistently solid US economy and will likely mean higher rates on some consumer and business loans.

The Fed’s key short-term rate is rising by a quarter-point to a still-low range of 0.75 percent to 1 percent. The central bank said in a statement that a strengthening job market and rising prices had moved it closer to its targets for employment and inflation.

The message the Fed sent on Wednesday is that nearly eight years after the Great Recession ended, the economy no longer needs the support of ultra-low borrowing rates and is healthy enough to withstand steadily tighter credit.

The decision, issued after the Fed’s latest policy meeting, was approved 9-1. Neel Kashkari, president of the Fed’s regional bank in Minneapolis, was the dissenting vote. The statement said Kashkari preferred to leave rates unchanged.

The Fed’s forecast for future hikes, drawn from the views of 17 officials, still projects that it will raise rates three times this year, unchanged from the previous forecast in December. But the number of Fed officials who think three rate hikes will be appropriate for 2017 rose from six to nine.

The Fed’s outlook for the economy changed little, with officials expecting growth of 2.1 percent this year and next year before slipping to 1.9 percent in 2019. Those forecasts are far below the 4 percent growth that US President Donald Trump has said he can produce with his economic program.

The Fed’s rate hike should have little effect on mortgages or auto and student loans. The central bank 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.

After the Fed’s announcement, major banks began announcing that they were raising their prime lending rate from 3.75 percent to 4 percent.

Mark Vitner, an economist at Wells Fargo, noted that the Fed’s statement provided little hint of the timing of the next rate hike. The lack of specificity gives the Fed flexibility in case forthcoming elections in Europe or other unseen events disrupt the global economy.

“They don’t want to prematurely set the table for a rate hike,” Vitner said. “I think they’re confident, but it’s hard not to be cautious after we’ve had so many shocks over the years.”

Stock prices rose and bond yields fell as traders reacted to the Fed’s plans to raise rates gradually. The Dow Jones industrial average, which had been only modestly positive before the decision was announced, closed up 112 points on Wednesday.

The Fed’s statement made few changes from the last one issued on February 1. But it did note that inflation, after lagging at worrisomely low levels for years, has picked up and was moving near the Fed’s 2 percent target.

And it adopted some new language hinting that it might be tolerant of higher-than-optimal inflation for some unspecified period. Economists said this suggested that officials could let inflation top their 2 percent target, just as inflation remained stuck below 2 percent for years after the Great Recession.

The new language “reflects the fact that inflation may run above 2 percent for some time,” Michael Gapen, an economist at Barclays, said in a note.

Many economists think the next hike will occur no earlier than June.

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