The Federal Reserve on Wednesday raised a key U.S. interest rate and signaled a somewhat more aggressive stance in 2018, underscoring the central bank’s confidence in a steadily growing economy but acknowledging the recent rise in inflation. The bank as expected lifted its benchmark federal funds rate by a quarter-percentage point — to a range of 1.75% to 2%. Yet the Fed also signaled a small shift in its thinking by projecting a total of four rate increases in 2018 instead of three as previously planned. Stocks DJIA, +0.03% turned lower and the yield on the 10-year Treasury note TMUBMUSD10Y, 1.573% moved higher after the decision. See: Live blog and video of Jay Powell press conference and Fed decision The move did not reflect a major departure, however, in the Fed’s strategy of gradually raising interest rates to keep the economy on an even keel. The “dot plot” shows only one official switched to a slightly higher interest-rate path. What’s more, Fed leadership remains closely divided over whether the bank should boost rates three or four times this year. Eight Fed officials said they expected interest rates to rise at least four times; seven forecast three rate hikes. “The revised dots show that officials were mostly divided in whether there will be one or two more rate increases in 2018,” said Raymond James chief economist Scott Brown. The lack of consensus reflects uncertainty about how high inflation will rise and how far the Fed can go before it damages the economy. “If you raise rates too quickly, you are just increasingly the likelihood of recession,” Fed Chairman Jay Powell said in a press conference after the Fed move. The Fed’s preferred inflation barometer, the PCE index, has already hit the bank’s long-run 2% target. Yet the Fed predicts inflation will end up around 2.1% by year end, suggesting central bankers think prices will ease later this year. What the Fed has found particularly surprising is the slow rate of increase in worker pay despite the lowest unemployment rate in almost two decades and growing shortages of skilled labor. “It’s a bit of a puzzle. I wouldn’t say it’s a mystery,” said Powell, who announced he will hold a press conference after all eight meetings of the Federal Open Market Committee each year instead of every other meeting. The FOMC is the arm of the Fed that actually sets interest rates. With the economy on its firmest footing in years, the Fed made several changes to the statement to reflect just how much it’s improved. See the June FOMC statement Most notably, gone is language that said the Fed expected the federal funds rate was “likely to remain, for some time, below levels that are expected to prevail in the longer run.” That’s a clear sign the Fed no longer thinks money is very cheap or that the economy needs as much help as it once did. “The economy is in great shape,” Powell said. Beyond this year, the Fed predicts it will raise rates three times in 2019 and one time in 2020 to push its benchmark rate up to 3.4%. Eventually the rate is expected to slip back to around 3% or a touch less. In a twist, the Fed raised the interest rate on excess reserves by only 20 basis points to 1.95%. The central bank first signaled the possible tweak in the minutes of its most recent policy meeting released last month.<doc-sep>WASHINGTON – The economy is revving up, and so the Federal Reserve is stepping up its plan to move interest rates closer to normal. As anticipated, the Fed raised its benchmark short-term interest rate Wednesday but it also upgraded its forecast from a total of three hikes this year to four amid an improving economy, falling unemployment and slightly stronger inflation. The move is expected to cascade through the economy, in particular nudging up rates for variable-rate consumer loans such as credit cards and adjustable-rate mortgages. It’s also likely to push up bank savings rates for Americans, especially seniors, who are finally realizing higher returns on CDs, bonds and other fixed-income assets after years of meager yields. "The main takeaway is the economy is doing very well," Fed Chairman Jerome Powell said at a news conference. "Most people who want to find jobs are finding them." The central bank lifted its federal fund rate – what banks charge each other for overnight loans – by a quarter percentage point to a range of 1.75 percent to 2 percent. That’s within shouting distance of its longer-run forecast of 2.9 percent. It’s the second rate hike this year and the seventh since the Fed began bumping up rates amid an improving economy in late 2015. For years after the Great Recession of 2007 to 2009, the Fed kept its key rate near zero to stimulate sluggish growth. In perhaps a telling sign, the Fed removed its previous assertion that its key rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run.” That suggests the Fed could push up rates more rapidly. Powell, however, said it simply means rates are getting closer to normal levels. The reaction in financial markets to the Fed’s latest move was relatively muted Wednesday, although stocks and bond prices fell. The Dow Jones industrial average, which had been down about 10 points before the Fed announcement, ended down 120 points, or 0.5 percent, at 25,201. Government bonds sold off as fixed-income investors begin to price in even higher rates than they had previously expected later this year. The 10-year Treasury yield, a benchmark for long-term rates, edged up from 2.947 percent before the Fed news to 2.976 percent. It is still well below its 2018 high of 3.113 percent from May 17. How fast rates will rise The big question ahead of Wednesday’s meeting was whether the Fed would keep its forecast for three quarter-point increases this year or bump it up to four. It raised it to four but maintained its projection of three more hikes in 2019. The Fed expects its key rate to rise to 2.4 percent at the end of the year, up from its prior estimate of 2.1 percent, reckoning unemployment will fall a bit faster than it previously thought and inflation will kick up a bit more, according to its median forecast. Eight of 15 officials now expect four hikes, up from seven in March. It now expects the rate will be 3.1 percent at the end of 2019, up from its previous projection of 2.9 percent. The forecast indicates Fed policymakers expect federal tax cuts and spending increases to juice growth. The economy The Fed predicts the economy will grow 2.8 percent this year, up from its March forecast of 2.7 percent, and it maintained its 2.4 percent estimate for 2019. “Economic activity has been rising and a solid rate,” the Fed said in a statement after a two-day meeting. The economy grew at a 2.2 percent annual rate in the first quarter, in line with its modest average throughout the 9-year-old economic expansion. But growth is expected to pick up to about 4 percent in the current quarter and average close to 3 percent this year. While the federal tax cuts and spending increases are goosing the economy, the Trump administration’s widening trade standoffs with other nations could slow growth by next year if proposed tariffs and tit-for-tat responses are carried through, economists say. Jobs The Fed estimates the 3.8 percent unemployment rate will fall to 3.6 percent by the end of the year and 3.5 percent by the end of 2019, below its March forecast of 3.6 percent. “Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the statement said. Since the Fed last met in mid-March, unemployment has fallen from 4.1 percent to an 18-year low of 3.8 percent. That could spur faster wage gains and inflation as businesses compete more intensely for fewer available workers. And that’s likely spurring the Fed to signal a slightly faster boost in rates. Inflation Amid the improving economy, inflation has picked up lately and Fed policymakers are looking for a slightly faster gain that leaves annual consumer price increases slightly above the Fed’s 2 percent target, though just marginally. The Fed said Wednesday it expects annual inflation to rise from 2 percent to 2.1 percent by the end of the year, up from its previous estimate of 1.9 percent, and 2.1 percent at the end of 2019, up from 2 percent. It expects a core measure that strips out volatile food and energy items to edge up from 1.8 percent to 2 percent at the end of the year, up from its previous 1.9 percent estimate. But it didn’t change its prediction that core inflation will hold steady 2.1 percent in 2019 and 2020. Overall, inflation remains largely contained. Many economists cite long-term factors such as the more global economy, e-commerce, the decline of unions and weak gains in the average worker’s output. Still, Powell said, "After many years of inflation below our objective, we do not want to declare victory." What it means The Fed is trying to raise rates enough to head off an eventual leap in inflation without derailing the recovery. The Fed appears to believe the falling unemployment rate could spur faster inflation and it’s no longer treating the economy with kid gloves.<doc-sep>Stocks fell after the Federal Reserve hiked interest rates and indicated that two more increases are likely this year. The Dow Jones industrial average fell 119.53 points to finish at 25,201.20 as losses in Boeing and Caterpiller shares offset gains in shares of Walt Disney Company. The S&P 500 lost 0.4 percent to close at 2,775.63 with consumer discretionary the only positive sector. The Nasdaq composite rose to a new intraday high early in the session as media stocks rallied following a federal judge's decision to permit AT&T's bid for Time Warner. The tech-heavy index later dropped 0.11 percent to finish at 7,695.70 following the Fed's decision. The Federal Reserve hiked interest rates 25 basis points after its June meeting as widely expected, but suggested two more increases are likely this year. According to the Fed's so-called dot plot, which tracks participant expectations for interest rates, members now expect four hikes this year, up from the three previously expected. The notion of a more aggressive Fed raised concerns about higher borrowing costs dragging on the economy and ultimately weighed on the market. Most of the mover lower came in the final 30 minutes of trading. The Fed changed several phrases from its prior memos, citing more optimistic economic growth and higher inflation expectations. "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," the Fed statement read. "Job gains have been strong, on average, in recent months, and the unemployment rate has declined." Wednesday's increase in rates moves the funds target rate to 1.75 percent to 2 percent. "I think the market is quite rightly globing on to the view that this is a more hawkish tone," said Eric Lascelles, chief economist at RBC Global Asset Management. "On the economic side, notwithstanding a middling start to the year, second-quarter economic growth is tracking for 4 percent. While that's probably not sustainable ... all of the economic checkpoints are reading quite strong." The yield on the benchmark 10-year Treasury note briefly rose above 3 percent following the central bank's statement before retreating back to 2.977 percent. The dollar index, which pits the greenback against a basket of other currencies, initially rose above 94 before backing off to 93.57. Media and telecommunications stocks rose on Wednesday, stemming the market's loss, following a U.S. District Court's decision to allow AT&T's $85 billion bid for Time Warner. The federal judge's ruling did not impose conditions on the merger's approval, clearing the way for other vertical deals. The approved deal gives the pay-TV provider ownership of cable companies such as HBO and CNN as well as film studio Warner Bros. Shares of Twenty-First Century Fox rallied 7.7 percent Wednesday, ahead of a widely anticipated bidding war between Comcast and Disney for portions of Rupert Murdoch's business. Disney, which offered Fox an all-stock, $52.4 billion deal for assets including cable networks and its entertainment businesses, will likely be forced to decide whether it's willing to top a significantly higher bid from Comcast. Disney shares finished 1.9 percent higher. After the close, Comcast offered $65 billion in cash for the Fox assets, a 19 percent premium to Disney's bid. Time Warner shares rallied 1.8 percent following the ruling, while online television and film company Netflix rallied 4.4 percent after Goldman Sachs reiterated its buy rating on shares and raised its price target to the highest on Wall Street. AT&T shares declined 6.2 percent.<doc-sep>Is the housing market, an engine of economic growth, starting to sputter? Home sales are slowing, spurring debate about whether the culprit is rising mortgage rates or low housing supplies. The past week, the average 30-year fixed mortgage rate increased from 4.61% to 4.66%, the highest level since May 2011, mortgage giant Freddie Mac said Thursday. The rate is up from 3.95% at the start of the year and a recent low of 3.78% last September. Thirty-year mortgage rates have risen in 15 of the first 21 weeks of 2018, the largest share since Freddie Mac began tracking the data in 1972. The healthy economy and prospects of higher inflation are pushing up yields on the 10-year Treasury bond to about 3%, and that rate directly affects mortgage rates. The nearly three quarters of a percentage point increase in mortgage rates so far this year would boost the monthly payment on a $200,000 mortgage by about $85, according to Greg McBride, chief economist of Bankrate.com. The higher costs may already be damping sales. Existing home sales fell 2.5% last month to a seasonally adjusted annual rate of 5.46 million and were 1.4% below the year ago level, the National Association of Realtors (NAR) said Thursday. From January through April, home sales are down 1% from the same period a year ago, according to NAR Chief Economist Lawrence Yun. More:Holiday deals: 3 things you can buy for less on Memorial Day weekend More:From their parents' basements to dream homes: Millennials are skipping starter houses More:Cope with soaring gas prices: Avoid these cars, SUVs with the worst fuel economy Some economists largely blame low housing supplies, not rates. There was a four-month inventory of existing homes on the market in April – the time it would take to exhaust the supply at the current sales pace -- compared with a balanced six-month stockpile. When units go up for sale, buyers are snapping them up. Homes typically stayed on the market 26 days in April, the shortest time frame since NAR began tracking the data in 2011. “I think the reason home sales are not rising is just that there’s no inventory,” says Freddie Mac Chief Economist Sam Khater. Also, the skimpy supplies are pushing up prices, another factor that could be discouraging some buyers. The median price of an existing house was $257,900 last month, up 5.3% the past year. But amid solid job and income growth and a stronger economy, higher rates and prices won’t stop the vast majority of Millennials from buying their first homes, Khater says. Most will simply buy smaller units, he says. Alternatively, they’ll buy homes further from the urban areas where they work, says Zilllow Senior Economist Aaron Terrazas. Yet both economists say higher rates are likely discouraging some existing homeowners who might otherwise sell their houses and buy larger ones. They may balk at forgoing their current low rates for a bigger monthly payment. “If they don’t really need the extra space, they’re not going to move, Terrazas says. He believes home sales have been tempered by a combination of the low supplies, higher prices and mortgage rates, and wages that have risen only modestly. But Ian Shepherdson, chief economist of Pantheon Macroeconomics, mostly attributes the tepid sales to higher mortgage rates. An index of mortgage applications for home purchases is up 3.5% from a year ago. But it’s down 6% on a seasonally adjusted basis since it peaked in December, Shepherdson says. Mortgage applications reflect home buyer demand and current rates, he says, rather than obstacles that may ultimately prevent shoppers from buying a house, such as low supplies and competition from other buyers. “It’s wishful thinking to argue that this isn’t about rates,” he says. In recent years, he says, every half percentage point increase in rates has cut mortgage applications by about 8%. Applications to refinance mortgages are more sensitive to rates and fell last week to the lowest level since December 2000, according to the Mortgage Bankers Association. The effects of higher rates are likely to intensify, economists say. Khater predicts the average 30-year fixed rate will climb to about 5% by the end of the year.<doc-sep>
The Federal Reserve raised interest rates on Wednesday for the seventh time since the financial crisis. In its monetary policy statement released Wednesday, the central bank increased the target range for its benchmark interest rate by 0.25% to a range of 1.75%-2%, the highest since September 2008. All eight voting members of the FOMC voted in favor of Wednesday’s decision. In raising its benchmark interest rate, the Fed cited an economy that is growing at a “solid” rate, an upgrade from its characterization in May of an economy growing at a “moderate” rate. The Fed added that job gains that have been “strong” in recent months and that, “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.” In May, the Fed noted that household spending had “moderated” from its strong pace in the final quarter of 2017. The most notable change to the Fed’s statement is the elimination of language suggesting that its policy would “for some time” remain accommodative. In May, the Fed said, “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” This language had been a feature of Fed statements for years. The clause was eliminated from the June statement. Ahead of Wednesday’s statement, some economists had speculated this language would be dropped. This tweak suggests Fed officials see monetary policy as nearing its neutral rate setting, or the interest rate at which the economy would experience full employment and price stability, which the Fed has defined as 2% inflation. Summary of economic projections The Fed’s latest release also included an updated summary of economic projections, which are aggregated economic, labor market, and interest rate forecasts from Fed officials. In this release, the Fed raised its outlook for growth and inflation this year while lowering its expectations for the unemployment rate. Story continues These projections also include the Fed’s “dot plot,” which illustrates expected future interest rates, and now shows most Fed officials see two additional rate hikes coming in 2018, bringing the year’s total to four. Federal Reserve In March, Fed officials were split on whether two or three additional rate hikes would be warranted over the balance of the year. On the labor market side, Fed officials lowered their median expectation for the unemployment rate this year to 3.6% from 3.8% in March,. The Fed also lowered its expectations for the unemployment rate in 2019 and 2020 to 3.5% from 3.6%. Over the longer run, Fed officials still expect the unemployment rate to be 4.5%. Since the Fed raised interest rates at its March meeting, the unemployment rate has dropped a further 0.3% to a 48-year low of 3.755% while the economy has added 537,000 jobs over that period. After increasing their forecasts for GDP growth notably in March, Fed officials on Wednesday again increased expectations for economic growth this year, now forecasting the economy will grow 2.8% in 2018. In March, the Fed had forecasted growth of 2.7% in 2018; a year ago, the Fed expected the economy would grow 2.1% this year. The Fed also reiterated its median expectation that the U.S. economy will grow 2.4% in 2019, 2% in 2020, and 1.8% over the long run. Inflation also got a 0.1% boost in Wednesday’s projections, with Fed officials now expecting that core PCE inflation – which is the Fed’s preferred inflation reading and strips out the more volatile costs of food and gas – will be around 2% this year. The Fed maintained its view that core PCE inflation would be 2.1% in each of the next two years. Federal Reserve Wednesday’s decision also included a technical tweak to the Fed’s interest rate policy, as the interest paid on excess reserves (IOER) will now be 1.95%, or 5 basis points below the ceiling of the Fed’s target range of 1.75%-2%. IOER had formerly been set at the top end of the Fed’s targeted Fed Funds range. In making this change, the Fed said it is, “intended to foster trading in the federal funds market at rates well within the FOMC’s target range.” In recent months, the effective Fed Funds rate had been around 1.7%, leaving only 5 basis points between the prevailing Fed Funds rate and the ceiling of the Fed’s target range.