Federal Reserve Raises Key Interest Rate, Signals 2 More Increases This Year
The Federal Reserve's Open Market Committee voted unanimously to increase its benchmark interest rate by a quarter of a percentage point and said it aims to raise interest rates twice more by the end of the year.
Wednesday's move brings the federal funds rate to a range of 0.75 percent to 1 percent. The increase was expected by the market and is consistent with what Fed officials had been signaling.
The Fed also said it is looking to increase rates three times next year, as inflation approaches the central bank's target annual rate of 2 percent, and the unemployment rate — now at 4.7 percent — appears stable.
"The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate," the central bank said in its statement, pointing to recent increases in inflation to within its target rate, and of the continued improvements in the labor market.
The critical change, says PNC economist Gus Faucher, is that the Fed's previous statement had promised "only gradual increases." Removing the word "only" from Wednesday's statement gave the Fed greater leeway to increase rates more rapidly.
In the news conference following the release of its statement, Fed Chair Janet Yellen underscored the greater optimism.
"We're closing in, I think, on our employment objective, we're coming closer on our inflation objective ... it looks to us to be appropriate to gradually raise the federal funds rate to neutral," Yellen said. She described "neutral" as a state where the central bank is neither putting on brakes, nor accelerating monetary policy to juice the economy.
Not everyone was pleased with the decision to hike rates, saying the economy is not as strong as the Fed makes it out to be, and that while employment is stable, wages have been stagnant.
"The economy still remains far below where it was predicted it should be in the beginning of the crisis," said Mike Konczal, a fellow at the Roosevelt Institute, in arguing for continued low rates.
Some other economists echoed that sentiment.
"The share of adults between the ages of 25 and 54 with a job hasn't even recovered to pre-Great Recession levels, which were, in turn, far below the peaks reached in the late 1990s," Josh Bivens, an economist with the Economic Policy Institute wrote in a blog. "And, most importantly, no durable and significant acceleration of wage growth to healthy levels has happened yet."
Yellen responded to those critics in her news conference, saying the Fed was concerned about putting off further increases much longer.
"Waiting too long to scale back some accommodation," she said, "could potentially require us to raise rates rapidly sometime down the road, which in turn could risk disrupting financial markets and pushing the economy into recession."