Fed Raises Key Interest Rate from 1% to 1.25%
The Federal Reserve has raised its key interest rate by 0.25% for the second time this year.
It voted to raise its key rate target to a range of 1% to 1.25%.
That is the highest level since 2008, when policymakers cut rates to encourage borrowing and spending after the financial crisis.
The central bank also said it would begin cutting its bond holdings and other securities this year.
The Fed cited continued US economic growth and job market strength as reasons for raising its benchmark interest rate.
Federal Reserve Chair Janet Yellen said on June 14: “Our decision … reflects the progress the economy has made and is expected to make.”
The rise was widely anticipated after a low unemployment rate, but other economic indicators, including inflation, have been weaker.
Data showed US consumer prices unexpectedly fell in May and retail sales recorded their biggest drop in 16 months.
This has raised questions about the bank’s future course.
US stock markets the S&P 500 and the NASDAQ edged down at the close.
However, the rate increase was already priced into most stocks.
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The Fed policymakers have been grappling with when and how to alter the policies put in place after the 2008 financial crisis to boost economic activity.
At the time, they cut interest rates and bought up US treasuries and mortgage-backed securities to keep rates low.
The Fed has a $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the financial crisis and recession.
In 2014, the Fed stopped its bond purchase program, known as quantitative easing, but it has continued to reinvest the assets on its books.
On June 14, policymakers said they aim to reduce that balance sheet, by reinvesting payments from those securities only above certain caps, totaling $10 billion.
The cap would escalate in three month intervals. It would start implementing those policies this year, assuming economic growth continues.
Janet Yellen said she’s not sure how far the committee will want to reduce the holdings over the long run, but she said they would be levels “appreciably below” those seen in recent years though larger than before the financial crisis.
The Fed raised interest rates for the first time since the crisis in December 2015.
Policymakers acted in December 2016 and again in March.
The June 14 decision was made with an 8-1 vote, with Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, dissenting. Neel Kashkari also voted against the March rise.
Interest rates remain low by historic standards. The board expects to raise rates at least three times this year.
The moves depend on the strength of the economy, which has been mixed.
On June 14, the US Labor Department reported that prices for goods excluding food and energy increased by 1.7% from May 2016, slowing steadily from earlier in the year.
That fell short of the Fed’s target of 2%.
Janet Yellen said the bank is aware of the shortfall and it was “essential” to move back to the target.
However, she said this year’s data may be skewed by one-off factors, such as lower prices on cell phone plans.
“It’s important not to overreact to a few readings,” she said.
“Data on inflation can be noisy.”
For US consumers, interest rate increases tend to lead to increased borrowing costs.