The Federal Open Market Committee (FOMC) voted to raise short-term interest rates at the conclusion of its June 13–14 meeting for only the third time since the financial crisis. After hiking the federal funds rate in December and March, the Federal Reserve increased rates by another 25 basis points, with a new target range of 1 to 1.25 percent. In making this decision, participants noted recent strengthening in the overall macroeconomy, including better data for consumer spending, business investment and hiring. Beyond this latest action, it is widely anticipated that the FOMC will increase rates one more time in 2017, perhaps as soon as its September 19–20 meeting. Such a decision, of course, would depend on continued improvements in economic activity, especially as the Federal Reserve remains “data dependent.” At this meeting, there was one dissenter: Minneapolis Federal Reserve Bank President Neel Kashkari, who felt that incoming data did not warrant an increase just yet.
In addition to raising short-term rates, the FOMC also seeks to normalize the size of its balance sheet, which has ballooned to well over $4 trillion. Prior to the Great Recession, it never exceeded $1 trillion. The Federal Reserve set new policy guidelines for reducing its balance sheet, as outlined in an addendum that the committee passed unanimously. Starting later this year, the Federal Reserve will allow $10 billion per month in Treasury securities, agency debt and mortgage-backed securities to not be reinvested. It would then increase that amount by $10 billion each quarter until it reaches $50 billion per month. In doing so, the FOMC’s actions would likely put further upward pressure on interest rates. Hence, its moves will be gradual in nature.
Meanwhile, participants also provided an update to the Federal Reserve’s economic projections. The outlook improved marginally from what was released in March. Members now see the U.S. economy expanding 2.2 percent in 2017, up slightly from 2.1 percent three months ago. It forecasts 2.1 percent real GDP growth in 2018. In addition, the Federal Reserve predicts the unemployment rate falling to 4.3 percent in 2017 and 4.2 percent in 2018. In March, that figure was 4.5 percent for both years. The Federal Reserve foresees 1.7 percent core inflation in 2017, down from 1.9 percent in the prior projection. In terms of the federal funds rate, the FOMC median figures are consistent with three additional rate hikes in both 2018 and 2019.
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