Fed Increases Rates, ‘Acknowledges Risks’

As generally predicted–and against President Trump’s wishes–the Federal Reserve raised its target for the federal funds rate by 25 basis points yesterday.

“The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions and inflation near the Committee’s symmetric 2 percent objective over the medium term,” the Federal Reserve said in a statement. “The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni said the Fed reacted to a noticeable slowdown in global growth, which has resulted in a substantial increase in financial market volatility. “The Federal Reserve has changed its tune with respect to the future path of hikes for the federal funds rate,” he said. “As highlighted in recent public remarks, Chairman Jerome Powell and the FOMC believe the fed funds rate is now quite close to the neutral level–the level which would keep the economy at full employment and stable inflation.”

Fratantoni noted the market had expected the quarter-point increase. “The job market is quite strong, with the unemployment rate below the level that can likely be sustained with inflation picking up,” he said. 

The Fed will likely only raise rates twice next year, Fratantoni predicted. “With this additional rate hike and with the ongoing crimping of liquidity caused by the shrinkage of the Fed’s balance sheet, we expect they will pause here for a few meetings,” he said.

CoreLogic Chief Economist Frank Nothaft called the Fed’s move to a target range between 2.25 and 2.5 percent “consistent with the latest data on labor markets and inflation.” He said the economy produced an average of 170,000 nonfarm jobs between September and November and the unemployment rate remains at a 49-year low 3.7 percent.

The latest inflation reading for personal consumption expenditures is running at 2 percent (October over October) consistent with the Fed’s 2 percent long-term inflation goal, Nothaft said. “The Fed considers monetary policy as accommodative for economic growth and prefers to raise short-term interest rates gradually to reduce the degree of economic stimulus coming from low interest rates,” he said.

Nothaft said the increase in the federal funds target will increase other short-term interest rates, including those serving as an index for adjustable-rate mortgages and HELOCs.

Wells Fargo Securities Global Economist Jay Bryson said the Fed acknowledged it is moving into a “data-dependent” mode. “The [Federal Open Market] Committee continued to state that the risks to the economic outlook appear roughly balanced,” he said. “But today the FOMC added that it will monitor global economic and financial developments to assess their implications for the economic outlook. In short, weaker-than-expected data, both in the United States and/or in major foreign economies, could derail further rate hikes, at least for the foreseeable future. Continued volatility in financial markets could also cause the Fed to pause.”

The Fed action came despite highly unusual criticism from President Trump, who has been sharply critical of the Fed and its chairman, Jerome Powell, in recent weeks. Trump tweeted yesterday that the Fed should “feel the market” and not raise rates.

In a news conference following the policy meeting, Powell said the President’s criticisms “have no bearing” on the Fed’s decisions.