Fed raises interest rates again in further sign of confidence in US economy

  • Central bank raises rate from 1% to 1.25% and plans to reduce bond holdings
  • Committee says job market has strengthened and suggests more rises in future

The US Federal Reserve announced it was raising short-term interest rates by a quarter percentage point on Wednesday as the central bank continued to unwind the huge economic stimulus plan brought in after the great recession.

After a two-day meeting, the Fed raised the target range of the federal funds rate from 1% to 1.25%, the third consecutive quarterly increase. The move follows a record run of jobs growth in the US that has driven the unemployment rate down to its lowest level in 16 years.

“Information received since the federal open market committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year,” the Fed said in a statement.

The committee signaled that more rises were on the horizon and that it “expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate”.

One member of the Fed’s committee objected to the rate rise. Neel Kashkari, chair of the Federal Reserve Bank of Minneapolis, wanted to maintain the existing target range for the federal funds rate.

Kashkari, who has been tipped as a potential successor to the current chair, Janet Yellen, has consistently warned against raising rates, fearing that it might harm the recovery. “We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains,” Kashkari wrote after objecting to a rate rise earlier this year.

The Fed also put out a statement about its plans to unwind its gigantic bond portfolio, bought as part of its bid to restart the US economy after the 2007-09 recession.

In the wake of that recession, the Fed went on an enormous spending spree, buying bonds in order to keep interest rates down and encourage spending to kickstart the economy. After three rounds of so-called quantitative easing, the Fed acquired $4.5tn worth of bonds, including $1.8tn in mortgage securities.

The committee said it planned to “gradually reduce the Federal Reserve’s securities holdings”. In a press conference, Yellen said the Fed intended the sale to be a quiet process that her colleague Patrick Harker, the Philadelphia Fed president, joked should be like “watching paint dry”.

The latest move by the Fed shows that the central bank continues to believe that the US economy is strengthening. Economic activity has “been rising moderately so far this year”, household spending has “picked up” and and hiring remains “solid”, the Fed said.

The Fed’s meeting was the first since May’s job report was released. Continued hiring brought the unemployment rate down to a level unseen since 2001 and it was the 80th consecutive month of jobs growth. Hiring has, however, “moderated”, as the Fed pointed out, and Yellen has expressed concern about the high number of people still in part-time work who are looking for full-time employment.

Greg McBride, Bankrate’s chief financial analyst, said: “As expected, the Federal Reserve followed through with an interest rate hike – the third in the past six months and fourth in the past 18 months.

“But this could be the last hike for a while. Until we see a reversal of the recent weakness in economic growth, retail sales and inflation, the Fed will be on the sidelines.”


Dominic Rushe in New York

The GuardianTramp

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