Fed raises interest rates as expected

By Yingcong (June) Fu

The Federal Reserve’s policy makers raised the federal funds rates rate by 25 basis points on Wednesday as expected, following their two-day meeting.

The federal funds rate–the rate that banks charge each other for overnight loans–was increased to a range of 0.75 percent to 1 percent. It was the third quarter-point rate hike since the Fed began raising interest rates in December 2015.

It was the third quarter-point rate hike since the Fed began raising interest rate in December 2015. (Yingcong (June) Fu/MEDILL)

In a statement, members of the Federal Open Market Committee projected the rate to be 1.4 percent at the end of this year, 2.1 percent at the end of 2018 and 3 percent at the end of 2019, as the economy and inflation hit the Fed’s targets.

The central bank has a mandate to foster maximum employment and price stability. “We expect core inflation to move up and overall inflation to stay around 2 percent over the next couple of years, in line with our longer-run objective,” said Janet Yellen, chair of the Board of Governors of the Federal Reserve System, in a press conference.

The annual unadjusted Consumer Price Index released on Wednesday increased 2.7 percent, the highest in five years, and the unadjusted core CPI, excluding volatile food and energy prices, increased 2.2 percent for the full year.

The unemployment rate in February released last Friday was 4.7 percent, marking the eighth consecutive months of a below-5 percent jobless rate.

The statement was “less hawkish” than expected, wrote Diane Swonk, an economist in Chicago, in a blog post. She wrote that means the FOMC didn’t raise the rate as high as expected and will tolerate some overshooting of inflation. “The next big debate will be how much overshooting the committee will actually tolerate,” Swonk stated.

Robert Dye, chief economist at Comerica Bank in Dallas, Texas, wrote in a note that the monetary policy position of the Fed was “somewhat tactical.” “By staying with their projections of three rate hikes this year and next, the Fed is maintaining flexibility around the exact timing of rate hikes,” he wrote. “However, the fed has now added weight to the precedent of one rate hike every other meeting,” he added.

The rate is still low compared to the historical level, and reflects a still-accommodative monetary policy. Yellen emphasized the Fed’s desire to return interest rates to a more “normal” level.

The FOMC’s next meeting is scheduled for May 2-3.

Photo at top: U.S. banknotes at Money Museum of Federal Reserve Bank of Chicago. (Yingcong (June) Fu/MEDILL)
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