Fed Raises Interest Rates Again As Economy Rolls On

Dec 13, 2017
Originally published on December 13, 2017 2:29 pm

Updated at 3:45 p.m. ET

For the third time this year and the fifth time since the financial crisis, the Federal Reserve has increased interest rates another quarter of a point.

Fed policymakers on Wednesday announced an increase in the benchmark federal funds rate to a range of 1.25 percent to 1.5 percent, the third increase in the key rate this year. The move — which will mean higher rates on consumer loans, some mortgages, credit cards and other loans — indicates the central bank is confident in the strength of the economy and ready to push rates to more normal levels.

In a statement, the Fed said the labor market has continued to strengthen and economic activity "has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further."

Economic growth has been running at a robust annual rate of just above 3 percent during the spring and summer.

The pending GOP tax overhaul being hammered out in a House-Senate conference committee is likely to provide additional stimulus in 2018 that could boost growth even more. That's led some Fed officials to suggest that the central bank may want to pick up the pace of its rate hikes to prevent faster growth from igniting more rapid inflation.

At a Wednesday afternoon news conference, her last as Fed chair, Janet Yellen said the proposed tax cuts would provide a "modest lift" to economic growth in coming years and should boost consumer and business spending.

Yellen said tax policy was up to the White House and Congress and that the Fed's job is to focus on monetary policy. Nevertheless, she noted that the tax bill is expected to increase the national debt relative to gross domestic product, adding that she is "personally concerned about the U.S. debt situation."

Updated economic forecasts from Fed officials released Wednesday suggest the Fed will raise rates three times in 2018. That's no change from their previous forecast, even though their forecast shows faster economic growth next year.

Over the past two years the nation's central bank has been gradually hiking its benchmark interest rate from a near-zero level. The fed funds rate influences a variety of other rates that consumers and businesses pay throughout the economy.

The Fed cut it to the near-zero level in December 2008 and kept it there for seven years in an effort to keep the economy on track after the financial crisis and ensuing recession.

The rate hikes have come at a time when there is very little inflationary pressure. In fact, inflation numbers have been consistently undershooting the Fed's 2 percent target in recent years.

Yellen will preside over one more meeting in late January and will step down in February. She has said she thinks the forces that have been holding inflation down are temporary and that she expects it will soon be on the rise again, given the economy's tight labor markets and improved growth rate.

With unemployment at 4.1 percent and the economy growing strongly, Yellen and others believe that employers will be forced to pay higher wages. That could also motivate companies to try to boost prices, triggering higher inflation.

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ROBERT SIEGEL, HOST:

Federal Reserve officials announced today another quarter-point hike in their official interest rate. That'll put upward pressure on interest rates throughout the economy, affecting consumers and businesses. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: This is the fifth rate hike since the Fed began raising rates late in 2015. That was after holding their official rate near zero for seven years to help the economy recover from the financial crisis. Today's hike will put the benchmark federal fund's rate in a range between 1 and a quarter and 1 and a half percent. Updated forecasts released by the Fed today show officials expect slightly faster growth next year. Speaking at her post-meeting news conference, Fed Chair Janet Yellen said that was largely due to the expected stimulus from the GOP tax cut pending in Congress.

(SOUNDBITE OF PRESS CONFERENCE)

JANET YELLEN: I think my colleagues and I are in line with the general expectation among most economists that the type of tax changes that are likely to be enacted would tend to provide some modest lift to GDP growth in the coming years.

YDSTIE: Yellen said the Fed would welcome an uptick in growth from the tax plan. But she also said she is personally concerned about projections that the tax bill could add a trillion dollars or more to the national debt over 10 years.

(SOUNDBITE OF PRESS CONFERENCE)

YELLEN: The addition to the debt, taking what is already a significant problem and making it worse is - it is of concern to me.

YDSTIE: Yellen said it could hinder Congress' ability to effectively respond to future downturns in the economy with added spending. Yellen was also asked whether the Fed is concerned about the stock market boom that sent stocks to record levels. She says it's obvious stock prices are elevated, but that doesn't necessarily mean they're overvalued.

(SOUNDBITE OF PRESS CONFERENCE)

YELLEN: We're enjoying solid economic growth with low inflation. And the risks in the global economy look more balanced than they have in many years.

YDSTIE: So, Yellen said, the booming stock market is not at the top of the Fed's list of concerns. This was Yellen's last scheduled news conference as Fed chair, and she reflected on her long experience at the Fed, including the past four years as its chair.

(SOUNDBITE OF PRESS CONFERENCE)

YELLEN: It's been an immensely rewarding experience for me. I feel very positive about what we've been able to accomplish.

YDSTIE: Yellen specifically noted the great improvement in the labor market under her watch that has pushed the unemployment rate to 4.1 percent, its lowest level in 17 years. Yellen also expressed confidence that her successor, Jerome Powell, is very capable of steering the Fed in the years ahead. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.