Fed bumps rates again

Plans to start reducing securities holdings this year

The U.S. Federal Reserve raised its federal funds rate by a quarter percentage point again today.

This is the third rate hike the Fed has made since December. In December 2015, the Fed raised the federal funds rate for the first time in nine years. It had been near zero since late 2008 as a result of the Great Recession.

With this latest increase, the federal funds rate, the interest rate at which banks and other financial institutions borrow from one another, is at 1 to 1.25 percent.

The Fed’s Federal Open Market Committee indicated it made the decision based on continued strengthening of the labor market and moderately rising economic activity. It pointed to solid job gains, a lower unemployment rate, higher household spending and expanded business fixed investment.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the FOMC said in its statement announcing the hike. “The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.”

The Fed also affirmed today it expects to begin reducing its securities holdings this year in a process it calls “balance sheet normalization,” another sign of its confidence in the economy. During the recession, the Fed bought up more than $4 trillion in Treasury and mortgage-backed securities in an effort to help rebuild the economy.

Looking forward, the Fed kept the door open to further gradual rate hikes.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation,” the FOMC said in its statement today. “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

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Molly Dill, former BizTimes Milwaukee managing editor.

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