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The Fed raises rates

As widely expected, the Federal Reserve raised short-term interest rates for the first time this year.

Fed Chair Janet Yellen was upbeat about the progress of the economy, although the consensus among Fed policymakers is that the economy will not grow over the next two years at an above 3 percent pace hoped for by the Trump administration.

Yellen told reporters that the committee is still forecasting growth in the gross-domestic product (GDP) at around 2 percent through 2019. She noted that Fed officials haven’t speculated much on the impact of administration’s fiscal policies, such as possible infrastructure spending package or the planned overhaul of the tax code. The committee's views about the economy haven’t changed much since the last Fed rate increase in December.

rateincres“The simple message is the economy is doing well,” Yellen told reporters after the two-day meeting.

The Federal Open Market Committee (FOMC) raised the federal rate by a quarter of a percentage point, to a range of 0.75 percent to 1 percent, which was only the third increase in a decade. The FOMC’s statement was little changed from earlier ones, but did note that business investment has improved. The statement mentioned the strong job gains. Inflation, however, has changed little and continues to run below the 2 percent annual target.

Most market analysts expect the FOMC to raise the rate by a quarter of a percent at least two more times this year. Yellen said, however, that the Fed will not move too quickly in raising rates. The long-run projection for the federal funds rate is now around 3 percent, she said, which represents a lower new normal for the rate than the historic average.

“We are holding to our forecast that the Fed will raise rates twice more this year, likely in June and September,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. Fratantoni said the Fed could establish a policy later this year that will allow its huge stockpile of mortgage-backed securities and U.S. Treasuries to begin running off its balance sheets.

“Given the size of their holdings and current market conditions, balance sheet runoff could have an even larger impact on mortgage markets than changes in their short-term rate target,” Fratantoni said. 

Fannie Mae Chief Economist Doug Duncan said the latest rate increase should have little impact on the home-purchase market.

“We believe the Fed could stay on course to achieve its dual mandate with a gradual monetary normalization, which would allow housing to continue to expand,” Duncan said. “Given continued solid job growth and recent income gains, we believe this pace of rate increase will not derail the ongoing housing recovery,” Duncan said.

The Fed’s vote was not unanimous. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, voted to keep the rates unchanged.


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