Coverage: Fed raises interest rates, sees more hikes

The Federal Reserve Board raised interest rates by 25 basis points on Wednesday and signaled that there would be more rate hikes if the economy continues to grow, but they would be gradual.

Martin Crutsinger of the Associated Press had the news:

The Fed’s key short-term rate is rising by a quarter-point to a still-low range of 0.75 percent to 1 percent. The central bank said in a statement that a strengthening job market and rising prices had moved it closer to its targets for employment and inflation.

The message the Fed sent Wednesday is that nearly eight years after the Great Recession ended, the economy no longer needs the support of ultra-low borrowing rates and is healthy enough to withstand steadily tighter credit.

The decision, issued after the Fed’s latest policy meeting ended, was approved 9-1. Neel Kashkari, president of the Fed’s regional bank in Minneapolis, was the dissenting vote. The statement said Kashkari preferred to leave rates unchanged.

The Fed’s forecast for future hikes, drawn from the views of 17 officials, still projects that it will raise rates three times this year, unchanged from the last forecast in December. But the number of Fed officials who think three rate hikes will be appropriate rose from six to nine.

Paul Davidson of USA Today reported that the stock market approved:

Wall Street cheered the Fed’s decision but reacted with restraint. The Dow Jones industrial average rose 113 points, or 0.5%, to 20,950. “The market got everything it wanted,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. The Fed “signaled the economy is doing better but reaffirmed that the pace of (rate hikes) will be gradual.”

The move is expected to filter through the economy, pushing up rates slightly for everything from mortgages and car loans to credit card debt and bank savings accounts.

“The simple message is — the economy is doing well.” Federal Reserve Chair Janet Yellen said at a news conference. “The unemployment rate has moved way down and many more people are feeling more optimistic about their labor prospects.”

The Fed’s rate hike Wednesday is likely to have the biggest and most rapid effect on short-term interest rates for auto loans and credit cards, exerting a lesser impact on longer-term loans such a 30-year mortgages.

Howard Schneider and Jason Lange of Reuters reported that inflation is rising toward the Fed’s target:

Fed Chair Janet Yellen pointed to growing faith in the economy’s trajectory.

“We have seen the economy progress over the last several months in exactly the way we anticipated,” Yellen said in a press conference following the end of a two-day policy meeting. “We have some confidence in the path the economy is on.”

The Fed also stuck to its outlook for two additional rate increases this year and three more in 2018. The central bank lifted rates once in 2016.

Stock markets extended gains .SPX and bond yields fell on the benign economic outlook and the continued steady path of rate rises signaled by the central bank. The dollar .DXY was trading lower against a basket of currencies.

Fed policymakers noted that inflation was now “close” to the central bank’s 2 percent target, and that business investment had “firmed somewhat” after months of weakness.

However, they did not flag any plan to accelerate the pace of monetary tightening, with the policy-setting committee reiterating and Yellen emphasizing that future rate increases would be “gradual.” At the current pace, rates would not return to a neutral level until the end of 2019.