The Federal Reserve raised interest rates on Wednesday with the federal funds for the second time in a decade and increased their projections of rate hikes for 2017 that includes one additional increase compared to their earlier projection in September, as the U.S. central bank moves to tighten monetary policy and strives for a new period of normalization.
The Federal Reserve decided to increase the federal funds by 0.25 basis points, sending the rate higher from 0.25 – 0.50 percent to 0.50 – 0.75 percent.
Following the rate decision, the U.S. dollar climbed to a 14 yr. high and the yield on the U.S. 10 yr. Treasury jumped 4.13 percent to 2.58 percent.
During the Fed’s 2 day December monetary policy meeting, policymakers at the Federal Reserve projected that the median target range for the federal funds will be 1.4 percent in 2017, higher than the 1.1 percent median projection from their September policy meeting, revealing there are growing expectations for more rate hikes next year.
Fed Chairwoman Janet Yellen said that economic growth has picked up since the middle of the year, household spending continues to rise at a moderate pace but business investment remains soft, despite some recent stabilization in the energy sector.
Yellen admitted that they expect inflation to rise to the Fed’s 2 percent inflation goal during the next couple of years as transitory influences of earlier declines in energy prices and import prices continue to fade, and as the job market strengthens further.
Policymakers at the Fed project that GDP in 2016 will be 1.9 percent, slightly higher than the 1.8 percent during their September meeting and then increase to 2.1 percent in 2017.
The median inflation projection is 1.5 percent in 2016 and rises to 1.9 percent in 2017 and 2 percent in 2018 and 2019.
With a new presidency set to begin in January and many unanswered questions still left on the table about the type of fiscal policies that will soon impact the U.S. economy with a Trump administration, the environment is hazy for central bankers at the Federal Reserve to make firm projections.
“We are operating under a cloud of uncertainty at the moment, and we have time to wait and to see what changes occur and to factor those into our decision-making,” Yellen admitted during the press conference.
Yellen explained that she won’t be steering the White House in terms of fiscal policies and plans to remain focused on pursuing the Federal Reserve’s dual mandate objectives of maximum employment and inflation.
“Well, I’m not going to offer the incoming president advice about how to conduct himself in policy. I’m a strong believer in the independence of the Fed. We have been given the independence by congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation, and that is what I intend to stay focused on. That is what the committee is focused on” Yellen said.