The U.S. Federal Reserve, as expected, raised interest rates on Wednesday for the first time in a year and also indicated it would quicken the pace of further increases in the coming years.
The Fed’s Open Market Committee voted unanimously to raise the key federal funds rate by a quarter point, from a range of 0.25 to 0.5% to a range of 0.5 to 0.75%. It was only the second time in a decade that the central bank has increased rates.
Fed officials attributed their decision to the strengthening labor market and indicators showing inflation is moving toward their 2% target.
“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that progress will continue,” Fed Chair Janet L. Yellen said at a news conference, calling the rate increase “a vote of confidence in the economy.”
She also suggested that the Fed’s role in the economy is starting to recede and that Congress will start taking over that job of helping to stimulate growth. Fiscal policy is “not obviously needed to provide stimulus,” she said.
The Fed has been holding rates at low levels to support economic growth by encouraging borrowing and risk-taking. Fed officials now predict they will raise the benchmark rate a little more quickly in the coming years, with three or more rate hikes in 2017 and the rate reaching 2.1% by the end of 2018.
In September, Fed officials predicted only one or two increases next year and a 1.9% rate by the end of 2018.
But according to The New York Times, if Republicans succeed in invigorating economic growth through infrastructure spending and other measures, “the Fed is likely to raise rates more quickly. The greater the stimulus, the faster interest rates are likely to rise.”
“Your expectation should depend very little on what you think that the FOMC is thinking and very much on your view of Trump policies and their macro effects,” said Jon Faust, an economist at Johns Hopkins University and a former adviser to Yellen.