- Alex Brandon/AP
The US Federal Reserve on Wednesday raised interest rates, affirming the strength of the economy.
“The simple message is the economy is doing well,” Federal Reserve Board Chair Janet Yellen said in a press conference. “We have confidence in the robustness of the economy and its resilience to shocks.”
The Federal Open Market Committee voted to raise its benchmark federal funds rate by 25 basis points to a range of 0.75% to 1%, marking its third increase since the Great Recession in the late 2000s. This will eventually increase borrowing costs for credit cards and other short-term loans.
Yellen said the rate hike did not reflect a reassessment of the Fed’s economic outlook.
The Federal Open Markets Committee projected two more rate hikes this year, unchanged from its previous estimate of three in 2017, and showing that it still expects a slow tightening pace. Only one member of the FOMC – the Minneapolis Fed’s Neel Kashkari – voted against a rate hike.
The Fed has not factored in the effects of potential fiscal-policy changes, Yellen said.
Higher infrastructure spending and tax cuts could stimulate the economy and inflation faster than the Fed anticipates. Measures of business and consumer confidence have surged since the election, reflecting these expectations.
“It’s uncertain just how much sentiment impacts spending decisions, and I won’t say at this point that I’ve seen hard evidence of any changes in spending decisions based on expectations about the future,” Yellen said.
“We have plenty of time to see what happens,” she said, adding that the Fed was not speculating on what President Trump’s administration would do. Yellen said she had a brief introductory meeting with Trump and had met a couple of times with Treasury Secretary Steven Mnuchin.
As the Fed continues to normalize rates, questions are arising about how it plans to shrink the balance sheet it expanded after the financial crisis. Yellen said the fed funds rate remained the preferred policy tool, and the Fed has not made a decision on its reinvestment policy.
She addressed the surge in market expectations for a rate hike in March, saying the market’s dovishness was likely influenced by the first two hikes being a year apart.