The Federal Open Market Committee (FOMC) voted to raise short-term interest rates at the conclusion of its December 12–13 meeting. It was the third increase in the federal funds rate, and only the fourth hike since the financial crisis. Specifically, the Federal Reserve increased rates by another 25 basis points, with a new target range of 1.25 to 1.50 percent.
In making this decision, participants noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” It also cited low inflationary pressures. At this meeting, there were two dissenters: Charles Evans and Neel Kashkari of the Chicago and Minneapolis Federal Reserve Banks, respectively. Both of them preferred to not change the federal funds rate. In addition to increasing short-term rates, the FOMC will continue to normalize the size of its balance sheet, as outlined in its June addendum and approved at the September meeting.
Beyond this latest action, it is widely anticipated that the FOMC will increase rates three times in 2018, at least according to the latest economic projections. Such increases, of course, would depend on continued improvements in economic activity, especially as the Fed remains “data dependent.”
Meanwhile, the outlook for growth improved in those projections. Members now see the U.S. economy expanding by 2.5 percent in both 2017 and 2018. That was up from estimates in September for 2.4 percent growth in 2017 and 2.1 percent in 2018.
In addition, the Federal Reserve predicts the unemployment rate falling to 4.1 percent in 2017 and 3.9 percent in 2018. In September, projections had the unemployment rate declining to 4.1 percent next year. The Fed foresees 1.5 percent core inflation in 2017, with that pace rising to 1.9 percent in 2018.
Janet Yellen will Chair the next meeting, which is scheduled for January 30–31, and if confirmed, which is expected, Jay Powell will assume the Chair role on February 1.
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