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Fed Reserve Approves Second Rate Hike This Year

June 15, 2017

By Gregory Arroyo

WASHINGTON, D.C. — With solid but moderating job gains and economic activity rising moderately, the Federal Reserve approved its second interest rate hike during its Federal Open Market Committee (FOMC) meeting on Wednesday.

The committee’s 8-to-1 vote — Minneapolis’ Noel Kashkari preferring to maintain the existing target range until inflation picks up — raises the federal funds rate a quarter point to a target range of 1% to 1.25%. With inflation on a 12-month basis expected to remain below 2% in the near term but stabilize around the Fed’s 2% objective over the medium term, the committee said near-term risks to its economic outlook “appear roughly balanced.”

“Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made, and is expected to make, toward maximum employment and price stability objectives assigned to us by law,” said Federal Reserve Board Chair Janet Yellen. “However, with employment near its maximum sustained level and the labor market continuing to strengthen, the committee still expects inflation to move up and stabilize around 2% over the next couple of years, in line with our longer-run objective.

“Nonetheless, in light of the softer recent inflation readings, the committee is monitoring inflations developments closely,” she added.

Economic growth has rebounded since the slowdown in the first quarter, resulting in a moderate pace of growth so far this year, the committee noted. Household spending, which was particularly soft earlier this year, has been supported by solid fundamentals, it added, including ongoing improvement in the job market and relatively high levels of consumer sentiment and wealth.

Business investment, which was weak for much of last year, has continued to expand, the Fed noted. And exports have shown greater strength this year.

“Overall, we continue to expect that the economy will expand at a moderate pace over the next few years,” Yellen said.

In the labor market, job gains have averaged about 160,000 per month since the start of the year, a solid growth rate despite being a little slower than last year. According to the Fed, the unemployment rate has fallen about a half a percentage point since the beginning of the year and was at 4.3% in May, a low level by historical standards and just below the median of committee member estimates of their long-run normal level.

Broader measures of labor market utilization have also improved this year, Yellen noted, adding that participation in the labor market has been little changed on a net basis for about three years. “Given the underlying downward trend in participation stemming largely from the aging of the U.S. population, a relatively steady participation rate is a further sign of improving conditions in the labor market,” Yellen said. “Looking ahead, we expect that the job market will strengthen somewhat further.”

As for inflation, the 12-month change in the price index for personal consumption expenditures was 1.7% in April, up from less than 1% last summer but down somewhat over the past few years. Core inflation, which excludes food and energy categories and tends to be a better indicator of future inflation, has also edged lower, the Fed said.

“The recent lower readings on inflation have been driven significantly by what appear to be one-off reductions in certain categories of prices, such as wireless telephone services and prescription drugs,” Yellen noted. “These price declines will, as a matter of arithmetic, restrain the 12-month inflation figures until the extraordinary low March reading drops out of the calculation.”

The fed’s median projection for growth of inflation-adjusted gross domestic product is 2.2% this year. It then edges down to 1.9% by 2019, slightly above the committee’s estimated longer-run rate. The median projection for the unemployment rate stands at 4.3% in the fourth quarter before ticking down to 4.2% in 2018 and 2019.

Policymakers also issued forecasts showing another three quarter-point rate increases in 2018.

With this week’s rate hike, auto loans aren’t expected to change much. According to WalletHub.com, the average APR on a 48-month new-vehicle loan rose from 4% in November 2015 to 4.52% in February 2017. The Fed had approved a rate hike in December 2015 but held off on its second increase in 10 years until this past December.

Credit card users are expected to feel the rate increase the most, costing them roughly $1.5 billion in extra finance charges this year. When the three previous rate hikes are factored in, credit card users will wind up paying about $6 billion more in 2017 than they would have otherwise, according to Wallethub.com. The firm expects outstanding credit card balances to surpass $1 trillion in 2017.

 

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