Federal Reserve officials raised their short-term interest rate target a quarter-point on Wednesday, the first increase in a year, and suggested that they might raise rates slightly faster next year.
The central bank will raise interest rates roughly three times in 2017, according to the median projection of Fed members, one more increase than projected in September.
The projections were released as the central bank carried out the rate hike, only the second increase since the 2008 financial crisis, to keep monetary policy from becoming too loose and risking the possibility of too-high inflation or financial bubbles. Those concerns have grown as the unemployment rate has dropped to 4.6 percent and U.S. economic growth has shown signs of accelerating. The target now will be between 0.5 percent and 0.75 percent. The decision was unanimous.
In a nod to the drop in unemployment in the past quarter, the Fed’s statement noted that it aimed to support only “some” further improvement in labor markets, an acknowledgment that the ability of monetary policy to counteract the effects of the recession may soon be played out.
The Fed’s two-day meeting in Washington was the first since Donald was elected. The Republican’s victory came with a market rally and a rise in bond yields that Fed officials came to interpret as a sign of confidence that they would have to raise their interest rate target in the months ahead, thanks to the stimulus taxing and spending measures favored by Trump.
Wednesday’s decision will feed into one of Trump’s criticisms of the Fed. He said in the first presidential debate in September that the Fed was keeping rates low to benefit Democrat Hillary Clinton and that the central bank would raise rates as soon as President Obama left office. He also predicted “you are going to see some bad things happen” in the economy when they did raise rates.
How Trump would react to Wednesday’s announcement from his Twitter account or elsewhere was one of the questions being asked about the decision.
The larger question, though, was whether the Fed would spell out a more aggressive course of monetary tightening in reaction to the recent good news about economic growth and the unemployment rate, which was lower in November than Fed officials previously thought it would go even when the economy was fully healed.
Yet there are still reasons for the Fed to remain cautious about raising rates to more historically typical levels, including slow growth worldwide and other factors that could be pushing down market interest rates.
Another reason, put forward by Chairwoman Janet Yellen, is that the Fed may have the opportunity to essentially run the labor market hot, driving unemployment so low that businesses looking for workers are forced to turn to groups that have been left behind in recent years, such as the long-term unemployed, the undereducated and the disabled. That’s already happening in some parts of the country. This month, the Federal Reserve Bank of Minneapolis published a report on the extraordinary measures some employers are taking to find labor, such as a masonry firm offering to drive workers 44 miles to the job site.
