Fed Raises Key Interest Rate, Citing Strengthening Economy

WASHINGTON: The Federal Reserve raised its benchmark interest rate Wenesday for just the sedond time since the financial crisis of 2008, saying the American economy is expainding at a healthy pace and setting itself up as a counterweight to Preseident-elect Donald J Trump's push for ocnsiderably faster growth.

The fred cited the steady growth of employment and other economic measures, and signaled that it expects to raise rates more quickly next year to prevent the economy from growing too quickly.

"My colleagues and I are recognizaing the considerable progress the economy has made," Janet L. Yellen, the Fed's chairwoman, said at a news conference after the announcement. "We expect the economy will continue to perform well."

The widely expected decision to move the Fed's benchmark rate to a range of .5 percent to .75 percent, still very low by historical standards. Low rates support economic growth by encouraging borrowing and risk-taking.

The American economy has expanded by about 2 percent a year over the last six years, and the unemployment rate has fallen to 4.6 percent. The Fed's assessment that the economy is growing at a healthy pace — not too hot, not too cold — is starkly at odds with Mr. Trump, who has promised 4 percent growth and has described job creation as "terrible" and economic growth as anemic.

Already on Wednesday, one Republican member of the House Financial Services Committee, Representative Roger Williams of Texas, criticized the Fed's move.

"Today's decision by the Fed to raise the interest rate is entirely premature and will be burdensome to a nation already struggling to pull itself out of this slow-growth Obama economy," Mr. Williams said in a statement. "By making rates even higher, the Fed is effectively making our hardships even harder."

Mr. Williams did not object when the Fed raised rates last December.

In announcing the decision after a two-day meeting of the Fed's policy-making committee, the central bank gave little indication that Mr. Trump's election had altered its economic outlook. The Fed said it still expected a slow economic expansion and a steady march toward higher rates. In separate forecasts also published Wednesday, Fed officials predicted three rate increases in 2017.

Rising Rate
The Federal Reserve raised its target rate for only the second time in more than a decade.

For the first time in recent years, however, there is a real possibility of significant changes in fiscal policy. Republicans will control the White House and both chambers of Congress, and Mr. Trump has promised to increase economic growth and job creation through tax cuts and infrastructure spending.

Those measures could spur faster growth after a presidential campaign in which Mr. Trump regularly disparaged the economy's performance under President Obama. But the Fed reiterated Wednesday that the economy is already expanding at roughly the maximum sustainable pace.

Fed officials also see evidence that the labor market is tightening. Several Fed districts reported labor shortages in the central bank's most recent compilation of economic reports. In the Philadelphia district, construction workers are hard to find. Atlanta reported a shortage of nurses; Kansas City, truck drivers; Dallas, tech workers.

Faster growth, in the Fed's judgment, would probably lead to higher inflation. As a result, if Republicans succeed in invigorating growth, the Fed is likely to raise rates more quickly. The greater the stimulus, the faster interest rates are likely to rise.

"Your expectation should depend very little on what you think that the F.O.M.C. is thinking and very much on your view of Trump policies and their macro effects," said Jon Faust, a professor of economics at Johns Hopkins University and a former adviser to Ms. Yellen, referring to the Federal Open Market Committee. "Don't focus on the Fed. As James Carville regularly reminded the other Clinton on the campaign trail: It's the economy, stupid."

Ms. Yellen emphasized that the Fed was not prejudging the likely course of events. She declined several times to comment on the merits of Mr. Trump's plans or to predict their consequences for the economy.

"We're operating under a cloud of uncertainty at the moment," Ms. Yellen said.

Fed officials predicted that they would raise the Fed's benchmark rate a little more quickly in the coming years, reaching 2.1 percent by the end of 2018. In September, they had predicted that it would reach 1.9 percent by the end of 2018. The new projections, however, reflect a significantly slower pace of increase than last December, when they expected the rate to reach 3.3 percent by 2018.

The combination of steady growth and faster rate increases indicates that some Fed officials expect the central bank to end up offsetting a modest increase in fiscal stimulus. But Ms. Yellen said most Fed officials were reserving judgment.

"Changes in fiscal policy or other economic policies could affect the economic outlook," she said. "Of course, it is far too early to know how those changes will unfold."

The tensions between monetary and fiscal policy will develop slowly. Legislation takes time to write, and any economic impact would generally be felt in coming years. Political pressures, however, may build more quickly.

Mr. Trump has made clear in the past that he likes low interest rates — and some of his plans, like infrastructure investment, will be much easier to fund if rates remain low.

"The Fed is in a tricky place," said Michael Feroli, chief United States economist at JPMorgan Chase. "They're trying not to prejudge how Congress and the administration duke it out, but once they see that, I think they will respond."

There is also uncertainty about the Fed's leadership. Ms. Yellen's term as chairwoman ends in February 2018, and Mr. Trump has said he would prefer a Republican.

Ms. Yellen could remain on the board, a possibility she said Wednesday she had not ruled out. But the Fed, under different leadership, might well choose a different path forward. Some conservative economists, notably John Taylor of Stanford University, argue that the bank should already have raised rates above 1 percent.

The economy, for now, keeps plodding along. Steady job growth has reduced the unemployment rate to a level the Fed considers healthy. A little unemployment is natural as people change jobs and businesses close. Ms. Yellen and other Fed officials have said they see some signs of stronger wage growth. Inflation, too, has picked up a little in recent months, although both wages and inflation continue to rise more slowly than the Fed would like to see.

Ms. Yellen described the rate increase as "a vote of confidence in the economy."

The decision was made by a unanimous vote of the 10 members of the Federal Open Market Committee, the first time in recent months the Fed has acted by consensus.

Some economists argue that the Fed should wait until inflation strengthens before raising rates, to test whether a stronger economy would persuade some people sidelined during the downturn to start looking for jobs. That would expand the labor force. Unemployment remains particularly high among minorities.

That view, however, has found little support among Fed officials, who worry that interest rates will have to be raised more quickly if they wait too long, increasing the chances of pushing the economy into recession.

"Apparently, Fed officials think the economy is growing too quickly," said Ady Barkan, the director of Fed Up, a coalition of liberal groups that has pressed the Fed to continue its stimulus campaign. "I doubt you can find many other Americans who share that opinion. And it's a strange conclusion to draw in the wake of an election that was so heavily impacted by voters' economic discontent."