Fed Raises Rates, Sees Faster Pace Of Increase In 2017

December 14, 2016

Washington (Reuters) – The U.S. Federal Reserve raised interest rates by a quarter point on Wednesday and signaled a faster pace of increases in 2017 as the Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50% and 0.75%. Bond yields and the dollar rose after the rate decision while stocks were mixed, with financials and tech the only two sectors to show gains.

Labor & Inflation Cited

"In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range," the central bank's policy-setting committee said in its unanimous statement after a two-day meeting.

"Job gains have been solid in recent months and the unemployment rate has declined," the Fed said, noting that market-based measures of inflation compensation had moved up "considerably."

More significant was a fresh batch of Fed policymaker forecasts that indicated the current once-a-year pace of rate increases will accelerate next year. Markets and the Fed appeared to be close on pricing with Fed futures markets pricing in at least two and possibly three hikes, up from one to two prior to the meeting.

Trump Shifting Fed Outlook

With President-elect Donald Trump planning a simultaneous round of tax cuts and increased spending on infrastructure, central bank policymakers shifted their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed's 2% target.

The Fed's median outlook for rates rose to three quarter-point increases in 2017 from two as of September. That would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3.0%.

 

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