The Federal Reserve Chair Janet Yellen, in a widely expected move, increased the interest rates
in US by 25 basis points to a range of 0.75% to 1% on Wednesday, but appeared less hawkish than expected.
The move to lift the target overnight interest rate was taken on the back of steady economic growth, strong job gains and confidence that inflation
is rising to the Fed’s target.
The latest Fed hike marks the first increase in 2017 and third one in the last two years. The central bank lifted rates once in December 2016 and December 2015 each.
The Fed also stuck to its outlook for two additional rate increases this year and three more in 2018, which is in line with its outlook from December.
Below are key takeaways from the Federal Open Market Committee’s statement and the following press conference chaired by Yellen:
On future rate trajectory
The FOMC stated to take a gradual course on future rate hikes depending on the economic outlook as showcased by incoming data. It expects the federal funds rate to remain below levels that are expected to prevail in the longer run.
“For some time the Committee has judged that, if economic conditions evolved as anticipated, gradual increases in the federal funds rate would likely be appropriate to achieve and maintain our objectives,” the FOMC said in a statement.
“Today’s decision is in line with that view and does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” it added.
On balance sheet
Fed reiterated its commitment to take a cautious approach at unwinding its huge $4.5 trillion balance-sheet. Yellen said Fed officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.
“The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalisation of the level of the federal funds rate is well under way,” noted FOMC statement.
The Fed's economic projections showed the economy growing 2.1% in 2017, unchanged from its December forecast. The median estimate of the long-run interest rate, where monetary policy would be judged as having a neutral effect on the economy, held steady at 3%
Meanwhile, the median projection for the unemployment rate stands at 4.5% in the fourth quarter of this year and remains at that level over the next two years, modestly below the median estimate of its longer-run normal rate, said Yellen.
Finally, the median inflation
projection is 1.9% this year and rises to 2% in 2018 and 2019,” she added.
On Donald Trump
Yellen told reporters she has had a brief meeting with President Donald Trump and Treasury Secretary Steven Mnuchin, but added Fed officials have not had a detailed discussion yet about the possible impacts of Trump’s economic program.
"We have not discussed in detail potential policy changes that could be put into place and we have not tried to map out what our response would be. We have plenty of time to see what happens," Yellen said in a press conference.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, was the sole dissenter who voted against the FOMC’s decision to hike interest rates.
“Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C Dudley, Vice Chairman; Lael Brainard; Charles L Evans; Stanley Fischer; Patrick Harker; Robert S Kaplan; Jerome H Powell; and Daniel K Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate,” said Fed in a statement.