9:26 AM, Dec 15, 2016 — The Federal Reserve said it expects a faster pace of tightening in the benchmark interest rate next year amid prospects for accelerated inflation and economic growth.
The Federal Open Market Committee raised the federal funds rate to 0.5% to 0.75%, the first increase since December 2015 and only the second in almost a decade. The Fed indicated three more hikes of about 25 basis points are on the block in 2017 provided the economy continues to strengthen as it did this year.
The rate increase was “well timed,” said Chad Morganlander, an analyst at Washington Crossing Advisers, though he expects the Fed to hike rates only twice in 2017, and that future increases will be measured.
“Over the next several years we believe the Federal Reserve path to rate hikes will be slow and consistent,” he said.
The US unemployment rate fell to 4.6% in November, according to the Department of Labor. FOMC members on Wednesday projected a median unemployment rate of 4.5% for next year, down from its September outlook for 4.6%. They also expect economic growth of 2.1% in 2017, up from the prior outlook for 2%.
While the FOMC’s view on the labor market and rising inflation were enough to bring on higher rates Wednesday, monetary policy makers were silent about the incoming administration of Donald Trump. Stock markets have surged since the election as investors hope Trump will come through with policies that bolster economic growth and slash taxes.
“In Q&A, Yellen was careful to tiptoe around the fiscal stimulus elephant, which suggests that the Fed’s hand could be forced to be more aggressive down the road, following what marks only the second rate hike in a decade,” Michael Wallace, global market strategist with Action Economics, said in an e-mailed note.
Existing home sales, another indicator of economic strength, rose in October, according to the most recent data from the National Association of Realtors. Sales grew 2% to a seasonally adjusted annual rate of 5.6 million in October, the highest in almost a decade, the association said. The sales pace in the month was almost 6% above the year-ago figure.
Oil prices, which in the first quarter of the year plunged to the lowest in almost a decade, have rebounded throughout 2016 and have recently risen after the Organization of Petroleum Exporting Countries said its members would curb production. West Texas Intermediate futures, the US benchmark, have almost doubled since falling to near $26 in February.
Inflation will rise to the Fed’s goal of 2% in the medium term as the effects of declines in energy and import prices dissipate and the labor market strengthens further, the FOMC said in its statment. Monetary policy remains “accommodative,” which supports further strengthening in the labor market.
FOMC members forecast the median Fed funds rate at 1.4% in 2017, up from a prior outlook for 1.1% and this year’s 0.6%, an indication of three rate increases of about 25 basis points each.
While that projection was “somewhat of a surprise,” according to Francois Genereux, a senior economist with Desjardins, the Fed “has often slashed the scope of its planned monetary firming measures. Our scenarios continue to call for only two key rate increases in 2017.”
Genereux said when the tightening cycle began a year ago, expectations were not for such a long gap between hikes, although the US economy was “disappointing” over that time period.
“Job gains have been solid in recent months and the unemployment rate has declined,” the FOMC said Wednesday. “The committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.”