The Federal Reserve, conveying continued concern about price pressures, raised its key short-term interest rate yesterday for the ninth...
WASHINGTON — The Federal Reserve, conveying continued concern about price pressures, raised its key short-term interest rate yesterday for the ninth time in a year and indicated it will keep moving the rate gradually higher in coming months to keep the lid on inflation.
Fed officials, in a statement released after their policy-making meeting, expressed confidence in the economy’s strength despite the recent surge in energy prices.
“The expansion remains firm and labor-market conditions continue to improve gradually,” the central bank’s top policy-making group, the Federal Open Market Committee, said after raising its benchmark federal-funds rate to 3.25 percent from 3 percent.
The group has raised the rate in nine quarter-percentage point steps over the last year from a four-decade low of 1 percent. During that time, the economy has expanded at a healthy pace, while unemployment has fallen and price inflation for items other than energy has remained tame.
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But Fed officials remain concerned about the potential for future inflation, citing rising labor and energy costs. They note that businesses are finding it easier to raise prices. And they are studying whether the nation’s booming housing market is helping push up consumer prices.
“Pressures on inflation have stayed elevated,” the Fed statement said.
Stocks fell after the announcement, as investors concluded that short-term rates will keep going higher for a while.
“There’s nothing here to hint that the rate hikes might stop soon,” Ian Shepherdson, chief U.S. economist for High Frequency Economics, wrote in an analysis of the Fed statement. “If anything, the hint is the other way.”
Fed officials also repeated that they probably can keep raising the fed-funds rate, the overnight rate charged between banks, at a “measured” pace in the months to come.
After nine quarter-percentage point moves, many investors have come to believe that “measured” means more of the same.
But Fed officials say the language implies the possibilities of a half-point rate increase or a pause in the credit-tightening process, depending on how the economy performs.
The federal-funds rate influences many other interest rates in the economy. Major banks are likely to follow by raising their prime rate on business loans by a similar quarter-percentage point to 6.25 percent from 6 percent. Consumer-loan rates tied to the prime, such as those on many credit cards and home-equity loans, may rise as well. Banks and other financial institutions may raise the rates they pay on savers’ certificates-of-deposit and money-market funds.
But longer-term interest rates, including mortgage rates, are determined by global financial markets and remain very low. The average rate for a 30-year fixed mortgage fell last week to 5.53 percent, the lowest level in 14 months, according to Freddie Mac, the mortgage-finance company.
Meanwhile, the fed-funds rate remains relatively low, adjusted for inflation, and therefore continues to stimulate economic growth.
The economy grew at a brisk 3.8 percent annual rate in the first three months of the year, the same pace as the previous quarter, even as the price of U.S. benchmark crude oil rose above $55 a barrel.
Even after oil prices topped $60 a barrel on Monday, many analysts forecast the economy will expand by about 3.5 percent this year — an above-average pace that should prompt employers to keep adding jobs.
Fed Chairman Alan Greenspan and others have said they want to move the rate to a neutral level that would neither spur nor slow economic growth. But Fed officials have not decided what that rate might be, agreeing only that it varies with economic conditions. Greenspan has declined to estimate the number, saying only that he’ll know when he gets there because he’ll see greater “balance” in the economy.
Other Fed officials and staff have estimated that the neutral rate lies between 3.5 and 5.5 percent.
Some central bank policy-makers have argued that the neutral rate may lie near the low end of the range these days because the burgeoning trade deficit is exerting a heavy drag on economic growth. But others believe it lies higher, and are willing to overshoot if necessary to ensure inflation remains under control.
Consumer prices for items other than food and energy rose just 1.6 percent in the 12 months that ended in May, well within the Fed’s comfort zone, according to a Commerce Department measure preferred by Fed policy-makers.
Fed officials also noted in their statement, reassuringly, that “longer-term inflation expectations remain well-contained.”