Fed, As Expected, Raises Rates to 2%
The Federal Open Market Committee surprised no one yesterday when it voted to raise the federal funds rate to between 1-3/4 percent and 2 percent.
The move, widely anticipated by economists, brings the federal funds rate to its highest level since 2006. In its statement (below), the FOMC cited strengthening labor markets, economic growth and rising inflation.
“Risks to the economic outlook appear roughly balanced,” the Committee noted. “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
Mortgage Bankers Association Chief Economist Mike Fratantoni said the rate hike was widely expected–and not the last hike this year, or next. MBA expects two more rate hikes this year and as many as three rate hikes next year, bringing the rate target above 3 percent.
“It is no surprise that the Fed continues to raise short-term rates,” Fratantoni said. “The economy is growing quickly because of tax cuts and more government spending, the unemployment rate is at an 18 year low, and inflation has picked up.
Fratantoni said MBA is not adjusting its macro or mortgage volume forecast. “MBA still expects strong economic growth in 2018 and 2019, and a possible slowdown in 2020,” he said. “Mortgage rates are anticipated to increase modestly, with the 30-year rate reaching 5 percent by the end of 2018, and 5.5% by the end of 2019.”
The full FOMC statement appears below:
“Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that 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. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.”
