US Federal Reserve Raises Rates

WASHINGTON – The Federal Reserve said Wednesday it would raise its benchmark short-term interest rate for the first time in a year and expects to lift it faster than previously projected in 2017.

Fed officials said they would nudge up the federal-funds rate by a quarter percentage point on

Thursday, to between 0.50% and 0.75%, a move that could cause other household and business borrowing costs to rise as well.


They also indicated they see a brightening economic outlook and expect to raise short-term rates next year by another 0.75 percentage point – likely in three quarter-point moves.


“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor-market conditions and a return to 2% inflation,” the rate-setting Federal Open Market Committee said in a statement.


In new language in its statement, the Fed said the rate increase came “in view of realized and expected labor-market conditions and inflation,” a sign officials see the labor market as close to, or at, full employment.


Fed officials said an improving economy was ready for higher borrowing costs, pointing to “solid” job gains, and rising inflation and consumer spending.


The Fed continues to expect “gradual” rate increases, the statement said, although forecasts showed officials see rates rising faster next year than previously thought.


Officials expect the median fed-funds rate to be 1.4% by the end of 2017, according to the projection of 17 officials. According to their forecast, the fed-funds rate would reach 2.1% at the end of 2018 and 2.9% in 2019. That implies three quarter-percentage-point interest-rate increases over each of the next three years. That is a faster pace than officials projected in September, when they only saw two rate increases next year.


The statement’s message centered on a strong labor market and repeated its view that “near-term risks to the economic outlook appear roughly balanced.” The Fed said it continues to closely monitor inflation indicators and global economic and financial developments.


When the Fed moves next will depend on various factors. Donald Trump’s election victory has boosted market expectations that the next administration will cut taxes and increase spending, which could spur growth and inflation. This has pushed major U.S. stock indexes to record highs since Election Day. Such expectations also sent the yield on the 10-year Treasury note above 2.5% for the first time in two years on Monday.


Fed officials judge the economy has made enough progress to warrant a further step on the path it started a year ago when it began a slow retreat from easy money. They raised the fed-funds rate by a quarter percentage point last December after holding it near zero for seven years during the financial crisis, recession and fitful economic recovery.


The Fed’s decision to raise rates cements the U.S. economy’s status as an outlier among the world’s largest economies. So far this year the European Central Bank, the Bank of England, the Bank of Japan and central banks in Brazil, South Korea and India have all cut rates – some into negative territory – to fuel stronger inflation and growth.


Officials’ projections for the coming years were generally rosier than their last batch in September, on a number of fronts. They expect inflation to rise from 1.5% in 2016 to 1.9% in 2017 and to its target of 2% in 2018.


They saw the jobless rate falling to 4.5% next year and remaining there through 2019.


The Fed welcomed recent signs of further improvement in the labor market. The jobless rate fell to 4.6% in November, a nine-year low.


“Job gains have been solid in recent months and the unemployment rate has declined,” the Fed said.


Officials predicted the economy would expand at a median annual pace of 1.9% this year and 2.1% in 2017, a slight improvement from September, when officials last submitted forecasts. The shift could reflect a recent stream of better economic data, or the fiscal outlook.


Fed Chairwoman Janet Yellen won a unanimous vote. Ms. Yellen had faced dissent at five out of eight meetings this year, a sign of divisions within the Fed over the path of monetary policy.


The central bank began this year expecting to nudge rates up four times in quarter-percentage-point increments. It didn’t move until now because of recurrent worries about growth, weak inflation, hiring and turbulence overseas – concerns that have since dissipated.


The Fed has been telegraphing the rate increase for months. In September, the central bank said the case for an increase had strengthened but found the economy had “a bit more running room,”


Ms. Yellen said. In mid-November testimony to Congress, Ms. Yellen said a rate increase was possible “relatively soon” due to the economy’s “very good” progress on job creation and inflation.

Whether other interest rates – such as on savings accounts, mortgages, car loans and corporate loans – rise as well depends on how investors, businesses and households respond.


In the past, Fed rate increases usually rippled through the economy, causing other borrowing costs to rise too. But the market doesn’t always follow the Fed’s lead. Between 2004 and 2006, when the Fed raised its benchmark short-term rate 4.25 percentage points, yields on 10-year U.S. Treasury notes and corporate bonds and mortgage rates barely budged because of strong global appetite for U.S. securities.


Ahead of the Fed’s announcement, John Caldwell, general manager of Galeana’s Van Dyke Dodge in Warren, Mich., said he expects little impact on car sales from a quarter-percentage-point rate rise.


“If our average loan of $25,000 has a term of six years, a quarter-point only adds $190. In the big picture it’s very small.”

Harriet Torry covers the Federal Reserve and US economy from the Washington, DC, bureau. Previously she covered the German government and economy from Berlin.