The Federal Reserve’s top policymaking body Wednesday voted to raise its main borrowing rate for only the second time in about a decade and signaled that the pace of rate increases could speed up next year.
The Federal Open Market Committee announced after meetings this week that it had decided in a unanimous vote to raise the federal funds rate from between 0.25 percent and 0.5 percent to between 0.5 percent and 0.75 percent, “in view of realized and expected labor market conditions and inflation.” The committee said inflation is still below the Fed’s 2 percent target.
Notable for markets, most Fed governors and regional bank presidents expect two or three rate increases next year — out of 17, six expect three hikes to be appropriate and four expect two hikes.
But the FOMC reiterated in its statement that it “expects economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”
Going forward, the Fed is expected to feel pressure to continue raising rates thanks to a period of sustained economic growth and low unemployment. The Labor Department’s first jobs report after Election Day showed that the economy added 178,000 jobs in November and the unemployment rate fell to 4.6 percent.
A question looming over the Fed will be how it reacts next year to the policies of the Trump administration. The president-elect and congressional Republicans are signaling plans for steep tax cuts and massive infrastructure investment, which could spur the central bank to take more action aimed at keeping the economy from overheating.
According to projections released Wednesday, Fed policymakers now expect the economy to grow slightly faster over the next few years than they did in September. While inflation growth projections were adjusted up some for 2016, they remain the same for the next three years.
As part of implementing the rate hike, the New York Fed, effective Dec. 15, will conduct overnight reverse repurchase operations at an offering rate of 0.50 percent, with a per-counterparty limit of $30 billion per day. The regional bank’s Open Market Trading Desk estimates about $2 trillion of Treasury securities in its account will be available for these operations.
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