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Fed Hikes Key Interest Rate, Signals Economic Strength

Fed Chair Janet Yellen
AFP/ Saul Loeb

The Federal Reserve increased its key interest rate by 0.25 percent on Wednesday, signaling the Fed’s continued confidence in the improving U.S. economy.

Fed officials raised its target for short-term interest rates by 0.25 percentage points to a range of 0.75 percent and 1.00 percent.

This is just the third time in a decade that the Fed has raised rates. The first was in December 2015 and the second in December 2016. The Fed is widely expected to hike its target rate multiple times this year as the economy shows signs of continued strength.

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the Fed said in a statement announcing the rate hike.

The Fed slashed its target rate to zero in 2008 in reaction to the financial crisis. It then deployed various unconventional monetary tools in an attempt to lower long-term rates even further.

The rate increase means that the Fed is confident that the U.S. economy can withstand higher rates, with consumers and businesses less needful of very low rates to sustain economic growth and price stability. Recent data on job creation, business confidence, consumer optimism, and inflation has made it clear that the economy has been growing stronger since the election of Donald Trump as president.

“Solid income gains and relatively high levels of consumer sentiment and wealth have supported household spending growth. Business investment, which was soft for much of last year, has firm somewhat and business sentiment is at favorable levels,” Fed chair Janet Yellen said at the start of her post-announcement press conference.

While Fed officials hinted that the Fed could raise rates at a faster pace this year, Wednesday’s statement shows that Fed officials still expect to raise rates just two more times this year. The long-term view of rates got slightly more hawkish, indicating a small move upward in rate expectations over the next few years.

Fed chair Janet Yellen will hold a news conference discussing the Fed’s views of the economy at 2:30 pm eastern.


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