The Federal Reserve raised short-term interest rates by a quarter point on Wednesday. It’s the third hike this year and a sign that the central bank believes the economy is on solid ground.
“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate,” the Fed said in its policy statement.
The Fed also upgraded its forecast for economic growth in 2018, saying that it expects the economy to grow by 2.5 percent. Previously, the Fed had projected 2.1 percent growth. Its longer-run forecast, however, remains at just 1.8%.
The Fed’s key interest rate target will now be a range between 1.25 percent and 1.5 percent. This is the rate that banks pay on overnight borrowing from other banks, setting the foundation on which longer-term interest rates for mortgages, business loans, and consumer loans are built.
The rate hike was widely expected. Economists and investors in futures that trade on the price of the overnight rate indicated a virtual certainty that the Fed would raise its target.
The Fed noted that inflation for items other than food and energy has declined this year and is running be3low the Fed’s 2 percent target.
The Fed has said it wants to gradually raise rates as the economy recovers from the prolonged slump that followed the financial crisis. Since long-term rates largely depend on expectations of short-term rates, which in turn depend on Fed policy goals and economic conditions, markets will watch closely what Fed policymakers say about their view of the economy, including indications that the Fed thinks the economy is strengthening more than previous forecasts indicated.
This meeting of the Fed’s monetary policy body marks the next to last for Janet Yellen, the outgoing chair of the Federal Reserve. She will have one more meeting in January, but that will not include a press conference. She has said she will step aside from the central bank when her term as chair expires early next year. Her spot will be taken over by Jerome Powell, a Fed official chosen by Donald Trump and approved by the Senate this fall.
Yellen will answer questions from the press at a conference starting at 2:30.