The Federal Reserve raised interest rates on Wednesday for the first time in a year and signaled that it could accelerate the pace of hikes in the coming months as the U.S. economy strengthens.
The Fed’s action which was widely expected lifted its target for the federal funds rate the interest rate banks charge each other for overnight loans by a quarter-point to a range of 0.5 percent to 0.75 percent.
It was the first rate increase since the Fed lifted rates from near zero in December 2015 and only the third such move since the Great Recession ended in 2009.
In a statement released after its two-day policy meeting the Fed noted that the economy had been expanding at a “moderate pace” in recent months and that job gains had been “solid.”
The Fed also said that inflation had been running below its 2 percent target for several years and that it expected prices to rise gradually in the coming months as the labor market tightens.
The statement added that the Fed would “monitor inflation developments closely” and would adjust rates if needed to reach its inflation target.
The Fed’s decision to raise rates was approved on a 9-0 vote with Esther L. George the president of the Federal Reserve Bank of Kansas City and Loretta J. Mester the president of the Federal Reserve Bank of Cleveland dissenting.
The Fed’s action was greeted with a sell-off in the stock market with the Standard & Poor’s 500-stock index falling 1.2 percent. Bond prices also tumbled sending the yield on the 10-year Treasury note up to 2.39 percent from 2.32 percent late Tuesday.
In its statement the Fed sought to reassure investors that it would not be too aggressive in tightening monetary policy.
“The committee expects that with gradual adjustments in the stance of monetary policy economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further” the statement said. “Inflation on a 12-month basis is expected to rise to the committee’s 2 percent objective over the next couple of years.”
The statement added that the Fed planned to “reduce the size of its balance sheet gradually and predictably” starting later this year. The Fed has been using unconventional tools to keep rates low and stimulate the economy since the financial crisis including buying trillions of dollars in government bonds and mortgage-backed securities.
The Fed’s decision to raise rates was based on a series of solid economic reports in recent weeks including a surprisingly strong jobs report for November. Employers added 178000 jobs last month and the unemployment rate fell to a nine-year low of 4.6 percent.
Other data showed that consumer confidence was near a 16-year high manufacturing was expanding at a healthy pace and inflation was starting to rise.
The Fed’s decision was also driven by a belief that the Trump administration’s policies on taxes spending and regulations could push economic growth and inflation higher in the coming years.
In a news conference after the meeting Janet L. Yellen the Fed’s chairwoman said that while it was too soon to know what policies the Trump administration would pursue “there are prospects for significant changes in fiscal policies.”
Ms. Yellen added that the Fed expected to have more information on the Trump administration’s plans in the coming months. For now she said the Fed was “operating under a fog of uncertainty.”
The Fed’s rate increase was not a surprise. In September Ms. Yellen said that the Fed expected to raise rates “relatively soon” if the economy continued to perform as expected.
Investors had been widely expecting the Fed to move in December and futures markets had priced in about an 80 percent chance of a rate increase at the meeting.
But the Fed’s decision to leave its policy unchanged at its last meeting in November surprised many analysts who had expected the Fed to act in the face of strong economic data.
In her news conference Ms. Yellen said that the Fed had debated the timing of the rate increase at its last meeting but that it had decided to wait for more evidence that the economy was on solid footing.
The Fed’s rate increase could have an immediate impact on consumers and businesses.
For consumers the Fed’s action will raise rates on credit cards and other variable-rate debt. It will also make it more expensive to borrow for cars home equity lines of credit and other loans.
But the rate increase is unlikely to have a major impact on mortgage rates which are already at historically low levels. Mortgage rates have risen in recent weeks but are still near 4 percent for a 30-year fixed-rate loan.
For businesses the Fed’s rate increase could make it more expensive to borrow for expansion and equipment. But the Fed’s action is also likely to make it easier for companies to attract customers and workers by offering higher wages and prices.
The Fed’s decision could also have implications for the global economy.
The dollar which has been rising in recent months as expectations of a Fed rate increase have increased is likely to continue to strengthen. A stronger dollar makes U.S. exports more expensive and imports cheaper.
The Fed’s action could also prompt other central banks to raise rates. The European Central Bank is meeting Thursday and analysts will be watching to see if it takes any steps to counteract the Fed’s move.
The Fed’s decision will also add to the pressure on China which is struggling to contain capital outflows and a declining currency. A stronger dollar makes it more difficult for China to keep its currency pegged to the dollar.
The Fed’s rate increase is a vote of confidence in the U.S. economy. But it is also a sign that the Fed is getting ready to normalize monetary policy after years of extraordinary measures to stimulate growth.
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Red white and blue
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The Constitution establishes the government of the United States and protects the rights of Americans.
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The two major political parties in the United States are the Republican Party and the Democratic Party.
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The head of state in the United States is the president.
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The head of the government in the United States is the president.
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The current president of the United States is Donald Trump.
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The current vice president of the United States is Mike Pence.
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The currency of the United States is the dollar.
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The national anthem of the United States is “The Star-Spangled Banner.
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The colors of the French flag are blue white and red.
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