Fed raises base interest rate in show of confidence for US economy

On Wednesday, the U.S. Federal Reserve raised interest rates, indicating a growing confidence in the domestic economy. This the second time in 2017 the Federal Open Market Committee of the Federal Reserve voted to raise the target range for the benchmark lending rate to 1.00 percent to 1.25 percent.

The Federal Reserves’ interest rate is the overnight lending rate banks and credit unions lend reserve balances to other depository institutions. It is an important benchmark for financial markets.

The rate raise comes in the face of mixed economic data. The Fed said the economy continues to strengthen and jobs growth remains solid, despite recent reports of weakening inflation and less than expected job growth. The rate increase could lead to higher borrowing costs for consumers but also better returns for individual savings accounts.

Additional increases could occur this year should economic conditions indicate a need for such action.

The Fed also announced that it expects to begin normalizing its balance sheet in 2017, including stopping the reinvestment of maturing securities the Fed holds. The gradual reduction in bond holdings could cause long-term interest rates to rise.

“What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis,” Fed Chair Janet Yellen said at a press conference following the Fed’s policy statement.

The Fed began to buy bonds in response to the 2008 financial crisis as a way to depress long-term lending rates. The effort to encourage economic growth resulted in the Fed dramatically increasing its holdings to $4.5 trillion.

The announcement of eventual holdings reductions was seen as another sign of confidence in the economy.

Fed Chair Janet Yellen said she believes the Fed can avoid “market strains” through a gradual process announced in detail well in advance. Her term as the central bank’s chair comes to an end in February 2018.

There has been no firm indication that President Trump intends to nominate Yellen for another term as head of the Fed.

 

[Reuters] [AP] [CNBC] [Photo courtesy Getty Images]