The Federal Reserve raised its benchmark interest rate by a quarter-point Wednesday, sending a message of confidence in the U.S. economy despite evidence of weaker price increases in recent months.
The increase, which will bring the Fed funds rate to between 1 percent and 1.25 percent, was highly anticipated by the markets. On Wednesday morning before the rate increase, Fed futures pointed to a 93.5 percent chance of a rate increase.
"The rate hike signals that the Fed believes the economy is improving and is going to be resilient to those hikes," said Tara Sinclair, a professor at George Washington University and a senior fellow at the jobs website Indeed.
The rate increase was the second this year and the third within six months. As such, consumers will begin to feel the impact of more expensive lending rates -- especially those with large adjustable-rate mortgages or those who carry credit-card debt, said Greg McBride, chief financial analyst at Bankrate.
"For a lot of people, they don't even notice," he said. "But for those where budgets are tight and their debt burdens have been growing the last few years, this is where the signs of strain begin to emerge."
The Fed described the rate increase as evidence of a stronger economy. It said that job gains had "moderated" but were still "solid, on average, since the beginning of the year." As it has in previous months, it said its interest rate remains "accommodative," meaning that it is still low enough to help fuel economic activity.
The U.S. job market has been growing robustly, and the unemployment rate reached a 16-year low in May. Yet metrics of inflation, including the Fed's favored measure, have consistently come in below the Fed's target, convincing some that the Fed should put off future interest rate increases.
In its news release Wednesday, the Fed said it expected inflation to remain somewhat below its 2 percent target in the near term but to eventually rise to meet that goal. It added that it was "monitoring inflation developments closely."
In a speech in January, Fed Chairman Janet Yellen argued that a gradual path of rate increases was the best way to avoid a more damaging scenario for the economy. If the Fed failed to raise interest rates gradually now, it might have to raise rates more quickly later in the event of rising inflation, and that could destabilize the economy, she said.
Board members didn't alter their projections for the economy much compared with what they had expected in March. The median projections showed that they expected the Fed's funds rate to reach 1.4 percent by the year's end, translating into one more rate increase this year after the June increase.
Economic projections also released by the central bank indicate that the Fed now expects the economy to grow 2.2 percent in 2017 and 2.1 percent in 2018. Board members did lower their estimates for the unemployment rate and inflation, metrics that have consistently fallen below their expectations.
The Fed's decision was nearly unanimous. Eight members of the Fed's deciding Federal Open Market Committee voted in favor of the rate increase. Only one, Neel Kashkari, the president of the Minneapolis Federal Reserve, voted against it. Kashkari has argued that economic conditions are not strong enough to justify raising the benchmark rate.
The Fed's announcement that it would begin paring its balance sheet later this year -- "provided that the economy evolves broadly as anticipated" -- involves its enormous portfolio of Treasury and mortgage bonds. The Fed began buying the bonds after the recession to try to depress long-term loan rates. That effort resulted in a fivefold increase in its portfolio to $4.5 trillion.
With rates on the rise, the Fed has said that it will soon begin to dismantle the last part of its post-crisis economic stimulus campaign. On Wednesday, it described its plans, though not the exact timing.
The Fed said it would initially reduce its holdings by $10 billion a month for three months, divided 60-40 between Treasury notes and mortgage bonds. It will then increase the pace by $10 billion every three months, maintaining the same division, until the reduction reaches $50 billion a month.
Madhavi Bokil, a vice president at Moody's Investor Services, said her group was closely monitoring information about how the Fed will roll down its balance sheet, to analyze what the effect might be on credit conditions. "We think that if the same gradual approach is followed, then any potential negative spillover would be limited," she said.
The Trump administration will have the opportunity to dramatically reshape the Fed through appointments. The Fed's Board of Governors has three unfilled positions, and Yellen's term as chairman and Stanley Fischer's term as vice chairman expire early next year. Although Trump criticized Yellen during the campaign, since his inauguration he has suggested he may be open to reappointing Yellen as chairman.
Yellen declined to say whether she would serve a second term if asked to stay on.
"I fully intend to serve out my term as chair," Yellen said at a news conference Wednesday in Washington, adding, "I have not had conversations with the president about future plans."
White House officials are reportedly close to nominating several people to fill vacant spots on the board, including financier Randy Quarles and economics professor Marvin Goodfriend.
On Wednesday, a group of Democrats on the House Financial Services Committee sent a letter to the White House criticizing some of the rumored choices for appointments to the Fed, in particular naming Goodfriend.
"It is disturbing that you are reportedly considering prospective Board of Governor nominees who have suggested narrowing or eliminating the Fed's full employment mandate, or undermining the Fed's ability to achieve full employment by requiring that the Fed adopt constraining, rules-based monetary policy," the letter says. "Proposing nominees of this type, exemplified by your second reported nominee Marvin Goodfriend, would be an error and a violation of your commitment to the American people."
"President Trump's reported nominees at the Federal Reserve hold opinions radically outside the mainstream of the American public and the economic consensus," said Rep. Gwen Moore, D-Wis., the ranking Democrat on the House Financial Services subcommittee on monetary policy and trade. "Emerging economic research indicates we can tolerate higher inflation if the trade-off means higher wages and lower unemployment."
Information for this article was contributed by Ana Swanson of The Washington Post; by Binyamin Appelbaum of The New York Times; and by Martin Crutsinger and Christopher Condon of The Associated Press.
Business on 06/15/2017