Federal Reserve Raises Interest Rates For Seventh Time Since 2015

The Federal Reserve concluded its June meeting by hiking interest rates a quarter percentage point. The seventh raise in two and a half years brings the federal funds rate to a range between 1.75 percent and 2 percent.

“The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation,” the release read.

Why It’s Important

The decision reflects intel touting continued strengthening of the U.S. labor market, a solid rise in economic activity, strong job gains, a declining unemployment rate and growth in household spending and business fixed investment. The rate tightening indicates expectations for continued economic strength.

“The upgrade to the summary of economic projections implies that the Fed recognizes it will soon face a monumental decision,” Joe Brusuelas, chief economist at RSM, said.

Brusuelas said the language of the policy statement is notable in that it signals the Fed “intends to tolerate temporary deviation away from its inflation target in the near term.”

“Perhaps more importantly, the selective use of the word symmetric does imply that Fed is looking at its range of policy tools ahead of the next economic downturn and one of those tools would be a temporary price level target that would rest on the foundation of a symmetrical policy objective with respect to inflation,” Brusuelas said.

The Financial Select Sector SPDR Fund XLF rose sharply on the news, while the S&P 500 and Dow Jones Industrial Average were relatively unfazed.

What’s Next

As the Wall Street Journal pointed out, international threats, including trade tension and European political instability, may inspire dovish Fed officials to push for a softer rate strategy going forward.

Under current conditions, however, the Fed is expected to continue to raise rates.

“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term,” the release read.

While Bankrate anticipates two interest rate hikes in the second half of the year, Brusuelas inferred a "growing probability" of just one more hike in 2018, likely in December, as the Fed pursues a perceived optimal policy of 2.55 percent.

"While, the remainder of 2018 will be defined by the late cycle fiscal boost in train and risks around the outlook linked to US trade protectionism and political risk in the Eurozone connected to the new government in Italy, the major policy decision by the Federal Reserve that will define the final innings of the business cycle likely arrive in the March to June period of 2019," Brusuelas said.

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Image credit: Dan Smith - Own work, CC BY-SA 2.5, via Wikimedia Commons