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US Fed boosts rates, sees faster pace of increases in 2017

December 15, 2016 08:34 IST

The US Federal Reserve has raised its benchmark interest rate by 0.25 per cent, only the second increase in a decade.

The Federal Reserve has increased its key interest rate by 0.25 per cent for the first time in a year in response to a strengthening United States economy.

“Today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by one quarter percentage point, bringing it to one half to three quarters per cent,” Janet L Yellen, Chair of the Federal Reserve System Board, told reporters at a news conference on Wednesday.

This is only for the second time in a decade that the Federal Reserve has raised its rate. The other one was in December 2015.

“In doing so, my colleagues and I are recognising the considerable progress the economy has made towards our dual objectives of maximum employment and price stability. The committee judged that a modest increase in the federal funds rate is appropriate in light of the solid progress we have seen toward our goals of maximum employment and two per cent inflation,” she said.

Yellen said economic growth has picked up since the middle of the year.

Household spending continues to rise at a moderate pace, supported by income gains and by relatively high levels of consumer sentiment and wealth.

Business investment, however, remains soft despite some stabilisation in the energy sector, she said.

“Overall, we expect the economy will expand at a moderate pace over the next few years. Job gains average nearly 180,000 per month over the past three months, maintaining the solid pace that we’ve seen since the beginning of the year.

“Over the past seven years, since the depths of the great recession, more than 15 million jobs have been added to the US economy. The unemployment rate fell to 4.6 per cent in November, the lowest level since 2007 prior to the recession,” the Federal Reserve Chair said.

The Federal Reserve Board, Yellen said, continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain our objectives.

“That is based on our view that the neutral, nominal federal funds rate, that is, the interest rate that is neither expansionary nor contractionary, and keeps the economy operating on an even keel, is currently quite low by historical standards.

“With the federal funds rate only modestly below the neutral rate, we continue to expect that gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years,” Yellen said adding that this view is consistent with participants’ projections of appropriate monetary policy.

The median projection for the federal funds rate rises to 1.4 per cent at the end of next year, 2.1 per cent at the end of 2018, and 2.9 per cent by the end of 2019.

Compared with the projections made in September, the median path to the federal funds rate has been revised up just a quarter of a percentage point. Only a few participants altered their estimate of the longer-run normal federal funds rate although the median edged up to three per cent, she said.

The economic outlook is highly uncertain, and participants will adjust their assessments of the appropriate path to the federal funds rate in response to changes to the economic outlook and associated risks, Yellen said.

Soon after the Fed rate increase announcement, Dow took a 207 point dip.

Responding to questions, Yellen emphasised that this is a very modest adjustment in the path of the federal funds rate, and involves changes by only, some of the participants.

“So, in thinking about the paths and the revisions, there are a number of factors that were taken into account by participants. The unemployment rate is perhaps a touch lower than previously you have seen some modest downward revisions in that -- in that projection. For this year, there was a slight upward revision to inflation,” Yellen said.

The decision to raise rates certainly be understood as a reflection of the confidence the Fed has the progress the economy has made and their judgement that progress will continue and the economy has proven to be remarkably resilient, Yellen said.

“So it is a vote of confidence in the economy. As you know, this was a decision that was well anticipated in markets and I think it will have relatively small effect on market rates. It could boost very slightly some short-term interest rates that could have an effect on borrowing costs that are linked to them. But overall, I think that households and firms will see very modest changes from this decision,” she added.

Image: Traders works on the floor of the New York Stock Exchange as a television screen displays coverage of US Federal Reserve Chairman Janet Yellen shortly after the announcement that the Federal Reserve will hike interest rates, in New York. Photograph: Lucas Jackson/Reuters

Lalit K Jha
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