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Fed raises interest rates as U.S. economy powers ahead

The Washington Post

December 14. 2017 12:55AM
U.S. outgoing Federal Reserve Chair Janet Yellen departs at the end of a news conference, her last planned public remarks as Fed Chair, after a two-day Federal Open Market Committee (FOMC) meeting in Washington on Wednesday. (REUTERS/Jonathan Ernst)

WASHINGTON — The Federal Reserve lifted its benchmark interest rate on Wednesday by a quarter point to a range of 1.25 to 1.5 percent, a widely expected move that the central bank said is happening because America’s economy continues to improve.

This is the fifth rate increase since the bank cut the rate to nearly zero during the financial crisis of 2008.

The Fed cast the decision as a positive signal that the U.S. economy is healthy. “The labor market has continued to strengthen” and “economic activity has been rising at a solid rate,” the Fed said in a statement.

Unemployment is now at the lowest level since 2000, growth is picking up and inflation remains tame. The Fed bumped up its expectations for growth this year and next. The economy is on track to expand 2.5 percent this year and next year, the Fed now says. Its previous estimate was 2.1 percent expansion in 2018. Unemployment is expected to fall even further to below 4 percent in 2018.

Fed Chair Janet L. Yellen, the central bank’s first female leader, will give her final news conference Wednesday afternoon before she steps down in early February. President Donald Trump selected Jerome “Jay” Powell, a Fed governor who helps decide interest rates, to replace her. The Fed’s next meeting is Jan. 30-31, but there is no a news conference scheduled for that session.

“The (Fed) statement was as dull as it gets, which is likely what Janet Yellen exactly wanted as she passes on the job to Jerome Powell,” said Peter Boockvar, managing director of the Lindsey Group in Virginia.

The stock market was sitting at record highs as the Fed made its announcement. Nearly everyone expected the Fed to raise the rate. Most Wall Street investors and economists were paying close attention to the Fed’s economic forecasts for next year. With Trump’s tax plan looking increasingly likely to pass a Republican-controlled Congress, growth is expected to pick up even more, putting pressure on the central bank to raise rates faster.

But the Fed still expects only three rate increases next year. The central bank is also continuing with its spelled-out plan to trim its balance sheet slightly in 2018.

“Fed is dovish in terms of a rate hike vision for 2018,” Naeem Aslam, chief market analyst at Think Markets in London, said after the central bank released its statement. “Their vision for the economic growth is slightly off beat from what the market was expecting. But, the overall reaction in the market isn’t that profound.”

So far, the rate hikes have not caused any noticeable pain in the economy or markets. But WalletHub analyst Jill Gonzalez warns that people with a lot of credit card debt will start to feel pinched as rates go up.

“As the interest rates rise, so does the cost of borrowing. Credit card users will feel the impact the earliest, since the rate hike will add another $1.46 billion in finances charges during 2018 alone,” Gonzalez said.

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