Fed Raises Target Funds Rate to 2.25 Percent

The Federal Open Market Committee, as expected, voted to raise the federal funds rate to its highest level since August 2008.

Following its policy meeting yesterday, the FOMC raised the target range for the federal funds rate to 2-2.25 percent. In comments following the meeting, Fed Chair Jerome Powell said the economy continues to show strength and that the Fed does not need to be as “accommodative” of a monetary policy that appears to be in line with expectations.

“My colleagues and I are doing all we can to keep the economy strong, healthy, and moving forward,” Powell said during a news conference. “That is the best way we can promote an environment in which every American has the opportunity to succeed.”

The announcement marked the third rate hike this year; the Fed is widely expected to raise the federal funds rate again at its December policy meeting.

Mortgage Bankers Association Chief Economist Mike Fratantoni said the rate hike was not unexpected. “Congress sets two objectives for the Fed: to keep the job market strong and to keep prices stable, defined by the Fed as inflation close to 2 percent,” he said. “The job market is incredibly strong, approaching 50-year lows for the unemployment rate, and inflation is now at or above the Fed’s inflation target. At the same time, inflation-adjusted short-term rates are negative, indicating that policy is still stimulative.”

Fratantoni said MBA expects long-term rates, including mortgage rates to increase, but nowhere near as fast as the increases in the federal funds rate in its forecast and projected by the FOMC. “The net impact of strong economic growth and only somewhat higher mortgage rates should remain a positive environment for the home purchase market, while continuing to winnow refinance demand,” he said.

The full FOMC statement appears below:

Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 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 2 to 2-1/4 percent.

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; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.