TradCatKnight: Economic Crisis: Fed raises rates for the second time in a decade
Economic Crisis: Fed raises rates for the second time in a decade
The stock market reacted calmly, while bond yields and the dollar rose. The yield on 2-year Treasurys hit its highest level in since August 2009.
The Federal Open Market Committee raised its target range from a range of 0.25 percent to 0.5 percent to 0.5 percent to 0.75 percent. The overnight funds rate currently sits at 0.41 percent.
The committee also approved a quarter-point increase in the discount, or primary credit, rate, from 1 percent to 1.25 percent.
The decision was unanimous. Previous meetings had featured dissents from as many as three members who felt the Fed should resume a rate-hiking cycle it began in December 2015.
In addition to approving the much-expected increase, the FOMC also indicated a higher rate than projected back in September when it last released the quarterly look ahead. The committee now expects three rate hikes in 2017, two or three in 2018 and three in 2019.
In effect, the Fed added one more hike during the entire period, with the longer-run target up to 3 percent from 2.9 percent.
“What they did was highly anticipated. There was a slight surprise in next year, looking at an additional rate hike,” said Myles Clouston, senior director of Nasdaq Advisory Services. “Overall, the Fed remains pretty steady overall, looking at gradual raises in interest runs in the long run.”
The closely watched dot-plot also indicated a somewhat more ambitious future for hikes.
However, the committee continued to emphasize in its post-meeting statements that the path higher will be “gradual.” It also stuck with language indicating that risks to the Fed’s forecasts remain “roughly balanced,” and emphasized that future moves will be data-dependent rather than subject to a set schedule.
On inflation, the committee said market-based measures remain low but have moved up “considerably,” a word that was omitted from the November statement.
On the jobs market, Fed officials indicated that full employment is getting closer.
“The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation,” the statement said.
That differed from November, when they included the more definitive “supporting further improvement in labor market conditions” language. There has been considerable discussion within the Fed about how close the labor market is to full employment, and this week’s developments indicate that officials believe that condition is getting closer.
The move came with an incrementally more upbeat look at the economy. This week’s statement said “economic activity has been expanding at a moderate pace since mid-year,” an upgrade from November’s assessment that growth had “picked up from the modest pace seen in the first half of this year.”
Committee members lifted their expectations for GDP growth from 1.8 percent in 2016 to 1.9 percent, and 2.1 percent in 2017 against the previous estimate of 2.0 percent. However, 2018 remained at 2.0 percent while 2019 also was bumped up a notch, from 1.8 percent to 1.9 percent. The longer-run GDP projection remained at 1.8 percent.
Headline inflation expectations were little changed overall, with 2016 moved up from 1.3 percent in September to 1.5 percent in Wednesday’s projections, but the longer-run outlook remained at 2.0 percent.
The Fed last hiked rates almost a year ago to the day — Dec. 16, 2015, to be exact — during a decidedly different time for the economy. GDP growth for… Read more »
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