In an expected move, the U.S. Federal Reserve today raised the federal funds rate a quarter point, to 0.5 to 0.75 percent.
The Federal Open Market Committee has not voted to raise the rate, the interest rate at which banks and other financial institutions borrow from each other, since December 2015, when it was raised by a quarter point. It was the first increase in the rate, which influences national interest rates, since June 2006. The federal funds rate has been near zero since late 2008 as a result of the Great Recession.
The committee cited the strengthening labor market, moderately expanding economic activity, job gains, a lower unemployment rate, increasing household spending and slight inflation as factors in its decision.
“Many people, including all bankers, thought that the Fed would raise rates today and so their quarter point raise was welcomed and expected by the banking industry,” said Rose Oswald Poels, president and chief executive officer of the Wisconsin Bankers Association. “As we’ve seen them deliberate the state of the economy, the various metrics they were measuring against, they saw continued improvement and those milestones they wanted to see have been reached. The economy was growing and stable and (it’s) the right time to start raising rates”
Attention now turns to whether the Fed will raise rates again, and how many times, in 2017. But that is largely unknown until president-elect Donald Trump takes office and his policies are put in place, experts say.
“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. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments,” the FOMC said in a statement about the decision.
PNC Bank’s economists predict “the Fed will move slowly, not a series of rapid-fire rate increases at every FOMC meeting. We are forecasting two additional 0.25 percent hikes in 2017 and 4 similar hikes in 2018. This approach would result in a much slower, more deliberate pace of ascent over the next two to three years, bringing the rate near 2 percent in 2019.”
Most Wisconsin bankers hope the rates continue to be raised gradually in 2017, Oswald Poels said.
“For 2017, I think it’s still a bit uncertain without knowing exactly what some of the priorities are going to be in a Trump administration,” she said.
The increased rates are still at historically low levels, so consumers likely won’t see a major impact from the decision, Oswald Poels said.
“I think they will start to see banks offer a little higher interest rates on their savings accounts and deposit accounts,” but also higher rates on loans, she said.
“There are a number of key risks in the year ahead, with the largest being if the economy unexpectedly shifts into a lower gear,” said Thom Melcher, PNC chief investment officer. “Beyond that, it is possible that the market has pulled some of its future gains into the current quarter. Should tax reform and fiscal stimulus slip late into 2017, we would expect some weakness as expectations adjust.”