22 Jun Fed raises interest rates and signals faster hikes on the way
Interest rates are going up again as the economy gets hotter. The Federal Reserve on Wednesday lifted its benchmark rate by a quarter of a percentage point, the second hike this year. And a majority of policy makers said they now expect a total of four interest rate increases this year. Fed officials had been split about whether to raise rates three times this year or four.
The decision reflected an economy that’s getting even stronger. Unemployment is 3.8%, the lowest since 2000, and inflation is creeping higher. The Fed is raising rates gradually to keep the economy from overheating.
“The main takeaway is that the economy is doing very well,” Fed Chairman Jerome Powell said at a news conference. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”
Higher borrowing costs
Mortgage rates have been climbing. The average rate on a 30-year fixed rate mortgage climbed to 4.66% this year in May, the highest in seven years, before falling slightly in recent weeks.
Home mortgage rates tend to move with the bond market, but rates can also rise because of a higher federal funds rate. A higher rate makes it more expensive for banks to borrow money, which can translate into higher borrowing rates for consumers.
In the bond market, too, investors are showing signs of concern about higher inflation and faster rate hikes. The yield on the 10-year Treasury note recently hit the highest level in almost seven years.
The Fed’s decision Wednesday was driven by “indications that inflation is right around the corner,” said Jason Reed, an economist and finance professor at the University of Notre Dame’s business school.
Inflation has been mysteriously low during the long economic recovery. But it has finally passed 2%, the level the Fed considers healthy.
The Fed’s preferred measure of inflation, which strips out food and energy prices, climbed in May to 2.2% and registered the biggest annual jump in six years. The Fed expects inflation higher than 2% over the next two years, according to its latest projections.
Powell said the Fed would be worried if inflation either persistently overshoots or undershoots the 2% target. He pointed out that inflation can “bounce around” over time, especially with a spike in global oil prices likely to raise prices.