To virtually no one’s surprise, the Federal Open Market Committee (FOMC) of the Federal Reserve raised the policy interest rate from a range of 0.25% to 0.5% to a new range of 0.5% to 0.75%. In its projections the Fed has lowered its 2017 outlook for the unemployment rate from 4.6% to 4.5% and increased is PCE inflation expectation from 1.3$ to 1.4% this year. The 2017 inflation projection calls for an increase to 1.9%.
The vote to raise the federal funds rate was unanimous. The FOMC noted that solid job gains, combined with a declining unemployment rate and rising household spending has lifted economic activity at a “moderate pace” since the middle of the year.
In considering future interest rate hikes the FOMC said it will take into account a wide range of information, including “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
The majority assessment for the appropriate 2017 mid-point of a federal funds rate range is 1.25% to 1.5%. Raising the rate a quarter point at a time would indicate another three hikes are on the table for next year. The majority assessment for 2018 has the policy rate in a range of 1.75% to 2%.
In its press release the FOMC noted:
The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Equity markets jumped initially, but when word that as many as 3 rate hikes were on the table for 2017, enthusiasm for stocks cooled. The DJIA dipped from a peak of 19,966.43 (a new high) to 19,826.98 within an hour.
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