Interest rate hike by Federal Reserve is likely to be followed by two more this year - Los Angeles Times
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Interest rate hike by Federal Reserve is likely to be followed by two more this year

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Get used to rising interest rates, which would boost your return on savings but cost you more on a mortgage and credit cards.

After a recession-plagued decade in which the Federal Reserve pushed its benchmark short-term rate to near zero and then kept it there, central bank policymakers on Wednesday nudged up the rate for the second time in three months.

That’s an accelerated pace after waiting a year between the previous two increases.

Fed officials also indicated that two more similar increases were coming this year amid solid job growth and rising inflation. And that’s not even taking into account the possible boost to the economy from the tax cuts and infrastructure spending promised by President Trump and congressional leaders.

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“The simple message is the economy is doing well,” Fed Chairwoman Janet L. Yellen told reporters. “We have confidence in the robustness of the economy and its resilience to shocks.”

After a two-day meeting, members of the policymaking Federal Open Market Committee voted 9 to 1 to raise the rate 0.25 percentage points to a target between 0.75% and 1%. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voted against the increase because he preferred to keep the rate steady.

The rate hike was widely expected after Yellen and other policymakers strongly hinted recently that the economy was ready for it.

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Still, stocks jumped after the Fed’s announcement and Yellen’s comments at a news conference shortly afterward.

The Dow Jones industrial average closed up 112.73 points, or 0.5%, at 20,950.10. The broader Standard & Poor’s 500 index increased 0.8% and the technology heavy Nasdaq composite rose 0.7%. The 10-year U.S. Treasury note rallied as yields, which move in the opposite direction of price, fell to 2.49%.

Mortgage rates had already adjusted in anticipation of Wednesday’s increase, said Bryan Sullivan, chief financial officer of Orange County lender LoanDepot. A 30-year fixed rate mortgage averaged 4.21% last week, the highest so far this year, according to Freddie Mac.

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That is still a historically low rate for home loans, and Sullivan doesn’t expect sharp increases in mortgage rates unless the Fed further accelerates the pace of rate hikes. But home buyers might want to jump rather than wait, he said.

“If somebody is right on the edge of ‘should we do this or not,’ it’s a good time to do it,” Sullivan said of a home purchase.

The Fed’s latest move — and the expectation of future rate boosts — was good news for seniors and others who have been complaining for years about puny interest payments on their CDs and other savings.

On Wednesday, Russell Branstetter, 70, who lives with his wife in North Little Rock, Ark., reached for the latest bank statement on a rewards money-market account in which the couple has about $16,000. The interest last month was $2.56.

“A regular savings account is worse than that,” said Branstetter, who still works as a full-time church pastor. His wife works part-time as an office administrator.

“To get a higher return on investments of a safer kind is welcome to us,” he said.

The Branstetters recently paid off the mortgage on their home and have zero debt. But consumers who have loans — car, home equity or credit cards — have seen their interest rates rising gradually over the last year and will soon feel an additional pinch as lenders pass on the Fed increase to customers in the coming months.

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Some analysts speculated that Fed officials on Wednesday could have indicated a faster pace of rate increases this year and next.

But the estimates from committee members remained at two more quarter-percentage-point rate increases this year and three next year — the same as they indicated the last time they made projections in December.

Those hikes would bring the benchmark rate to 2.1% by the end of 2018 — still historically low but a level not reached since early 2008.

Yellen said that she and her Fed colleagues were not making any assumptions about what fiscal policy changes might be coming from the White House and Congress.

With “great uncertainty” about what policies might be enacted, “we have plenty of time to see what happens,” Yellen said.

She acknowledged an “obvious and notable” increase in consumer and business confidence since Trump’s election. But Yellen said she hasn’t yet seen “any hard evidence” that has translated into increased spending.

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“I think it’s fair to say that many of my colleagues and I note a much more optimistic frame of mind among many businesses in recent months,” she said. “But I would say that most of the businesspeople that we’ve talked to also have a wait-and-see attitude.”

The Trump administration probably is keeping a close eye on the Fed’s policy. Trump has promised to sharply boost economic growth to as much as 4% — an unusually aggressive pace that is double what Fed officials and most private economists have projected over the next few years.

If Trump succeeds in accelerating growth, that could prompt the central bank to push up rates at a faster pace — putting the Fed at odds with the White House.

“I think there will be a collision course in the future where the power makers on the monetary and fiscal side will clash,” said Sumit Agarwal, a business professor at Georgetown University and former economist at the Federal Reserve Bank of Chicago.

“The Fed’s objective is to maintain a very steady-state inflation rate and actually have a growth base that keeps the unemployment rate at what the natural rate should be,” he said. But the Trump administration wants a very strong growth rate, he said, “and to achieve that we will see inflation, which the Fed will be working very hard to guard against.”

The Fed has a dual mandate to promote maximum employment and stable prices, and the economy is near both goals.

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The unemployment rate was 4.7% in February after another strong month of labor market growth in which the economy added 235,000 net new jobs. That is in line with the Fed’s long-term projection of 4.7%.

Inflation was 1.9% for the 12 months that ended Jan. 31, its highest annual level since 2012, according to the Fed’s preferred measure based on total personal consumption expenditures.

New economic projections released by the Fed were essentially the same as the last estimates in December.

Policymakers expect 2.1% growth in 2017 with the unemployment rate dropping to 4.5% by the end of the year. Growth will be the same in 2018, a slight improvement from the December estimate, but would tick down to 1.9% in 2019.

Trump says businesses can’t borrow because of Dodd-Frank. The numbers tell another story »

Obama saw low-wage workers as struggling moms. Trump may see them as suburban teens »

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UPDATES:

1:00 p.m.: This article was updated with comments from Yellen and the reaction of the stock market.

2:40 p.m.: This article was updated with more analysis and data.

This article originally was published at 11:20 a.m.

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