By Martin Crutsinger
AP Economics Writer
WASHINGTON (AP) — The Federal Reserve has raised an important interest rate in response to a strengthening U.S. economy and expectations of higher inflation, and it foresees three more rate hikes in 2017.
The Fed’s move will mean modestly higher rates on some loans.
Wednesday’s action signaled the Fed’s belief that the U.S. economy has improved over the past year after a rough start to 2016 and can withstand slightly higher borrowing rates. Its expectation of three rate increases in 2017 is up from two from its forecast three months ago.
The central bank said in a statement after its latest policy meeting that it’s raising its benchmark rate by a quarter-point to a still-low range of 0.5 percent to 0.75 percent. The Fed last raised the rate last December from a record low near zero set during the 2008 financial crisis.
The Fed’s decision, which lead to only the second rate hike in the past decade, was the result of a 10-0 vote. It also released an updated economic forecast that showed modest changes to its outlook for economic growth, unemployment and inflation, mainly to take account of a stronger economy and a drop in the unemployment rate for November to a nine-year low of 4.6 percent.
James Marple, senior economist at TDBank, said the Fed’s forecast of three rate increases next year, up from two, was the “only real surprise” Wednesday.
“The move up is a signal that the Fed has become more confident in the economic outlook and that inflation will increasingly track closer to the 2 percent target,” Marple said.
The Fed’s rate hike should have little effect on mortgages or auto and student loans. The central bank doesn’t directly affect those rates, at least not in the short run. But rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed’s key rate.
“This single quarter-point move in interest rates will go largely unnoticed at the household level, but coupled with last year’s hike, the cumulative effect could mount quickly if the Fed quickens the pace of rate hikes in 2017,” said Greg McBride, Bankrate.com’s chief financial analyst.
After the Fed’s announcement, several major banks said that they were raising their prime lending rate from 3.50 percent to 3.75 percent. The prime rate is a benchmark for some types of consumer loans such as home equity loans. BB&T and Citigroup were among the banks to announce the increase.
Mortgage rates have been surging since Donald Trump’s presidential victory last month on expectations that his calls for deregulation, tax cuts and increased spending on infrastructure would accelerate economic growth and inflation.
At a news conference, Fed chairwoman Janet Yellen said such policies would be unlikely to maximize employment, since the unemployment rate is now slightly below the Fed’s own long-term target.
“I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now,” she said.