WASHINGTON — The Federal Reserve’s Federal Open Market Committee raised the federal funds rate 0.25% on Wednesday, marking only the third rate hike since the financial crisis and a sign that the central bank sees the economy as finally heating up after a sluggish recovery
In a press statement, the committee said that gains in the job market and gradually increasing inflation has made the conditions right for a rate increase, but noted that the interest rate environment is still highly accommodative by historical standards.
“In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range for the federal funds rate to .75-1%,” the statement says. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.”
Minneapolis Fed President Neel Kashkari — a noted critic of post-crisis reforms — was the lone dissent on the committee, preferring instead to “maintain the existing target range,” according to the committee statement.
The rate increase suggests that the Fed is hoping to quell some of the "animal spirits" that have been bubbling in the financial sector since the election of Donald Trump in November in anticipation of a more business-friendly tax and regulatory environment, as well as potential infrastructure stimulus and increased energy production.
Fed Chair Janet Yellen and other member of the committee had telegraphed in the preceding weeks that a rate hike was likely and markets have largely anticipated the move.
Nine of the committee’s 17 members expected the federal funds rate to fall between 1.25% and 1.5% by the end of 2017, suggesting three 0.25% rate increases this year. Another four members expected rates to settle between 1.5% and 1.75% this year, while three thought the rate would be lower than 1.25%. One member expected the rate to rise to between 2% and 2.25%.
Wednesday’s announcement contrasts with the December 2016 FOMC meeting, which was the last time the FOMC raised interest rates. In that meeting, six members expected three rate hikes in 2017, while another six thought year-end rates would be even lower. The momentum seems to have shifted decidedly toward a more aggressive monetary policy, with only three FOMC members anticipating rates under 1.375% in 2017.
The committee’s economic projections, meanwhile, were essentially unchanged from its December meeting. Estimates for core personal consumption expenditures inflation (which controls for variable prices related to food and energy) ticked up to 1.9% from a 1.8% estimate in December, but all other estimates remained identical. The committee expects interest rates to settle around 3% by 2019 and longer run inflation to settle around 2% around the same time.
