The Federal Reserve on Wednesday announced that it decided to raise interest rates, and signaled that it will hike later this year more than it had expected.
In a two-day meeting, the Federal Open Market Committee (FOMC) voted to lift the target range for the federal funds rate by 25 basis points to 1.75%-2%. And in a few hours, several banks will respond by raising their prime lending rate, the starting point of borrowing costs for nonmortgage loans like credit cards and auto loans.
This was the seventh rate hike since late 2015, when the Fed first started the process of lifting interest rates from almost zero. It kept borrowing costs that low after the financial crisis to encourage businesses and consumers to spend and grow the economy.
A decade after the recession, the Fed has made progress on its objectives. The unemployment rate in May was 3.8%, the lowest since 2000 and 1969, while inflation was just below the Fed’s 2% target.
After two rate hikes in 2018, investors were focused on the Fed’s updated projections for increases during its remaining meetings for the year.
In March, the dot plot, which reflects where voting FOMC members stand, showed an equal split between those who favored three rate increases this year and those who favored four. All it took to tilt the new dot plot in favor of four rate hikes was one official changing their opinion.
Fed Chairman Jerome Powell will face reporters during a press conference at 2:30 p.m. ET. This is partly why a rate hike is expected; the Fed usually only hikes when there are pressers so the chair can talk about the decision. But this could change soon, according to a Wall Street Journal report on Tuesday that said Powell was considering press conferences after every meeting. It would allow the Fed to be less choreographed and more flexible in cutting or raising rates as economic conditions warrant.
In addition to a new dot plot, the Fed will update its forecasts for economic growth and inflation — key to watch in light of some concerns about US trade policy. In March, Fed officials raised their prior forecast for gross-domestic-product growth in 2018 to 2.7%. In the longer run, they see growth at a 1.8% pace, weaker than the White House’s forecast for 3% growth in 2021.
Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
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 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.