The US Federal Reserve raised interest rates for only the second time since the financial crisis yesterday and indicated that it will embark on a more hawkish course next year.
The central bank’s federal open market committee voted unanimously to raise the target range for the federal funds rate by 25 basis points to 0.5 per cent to 0.75 per cent. Economic projections published with the committee’s decision suggested that it would make three similar increases in 2017, one more than expected.
Janet Yellen, chairwoman of the Fed, said that the decision to raise rates was a vote of confidence in the economy.
Growth was “a touch stronger” and unemployment “a shade lower” than expected, she added. The committee said that it decided to raise rates “in view of realised and expected labour market conditions and inflation”.
It added that it would “carefully monitor actual and expected progress toward its inflation goal” of 2 per cent.
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Donald Trump’s pledge to cut taxes and spend $1 trillion on infrastructure have added to inflationary pressure, along with recent jumps in oil.
Ms Yellen declined to comment on the impact of the president-elect’s plans or on Mr Trump’s criticism of her and the Fed during the US election.
“I’m not going to offer the incoming president advice about how to conduct himself. I’m a strong believer in the independence of the Fed,” she said.
Ms Yellen added that she intended to serve out the entirety of her four-year term, which expires in 2018.
Some economists believe that rates will need to rise further and faster next year to keep inflation in check.
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Several forecast four rate increases, although others have suggested that too little is known about Mr Trump’s plans to steer away from the course plotted by the committee.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “The bump up in the rate hike projection for next year is a response to the latest decline in unemployment and the apparent pick-up in growth since mid-year. We’re slightly surprised to see it, but it is a welcome development.”
Russ Mould, investment director at AJ Bell, said: “Rising US interest rates are likely to underpin the strong dollar which will continue to boost dollar-earning UK listed stocks such as miners and oil and gas companies. This would lend support to the overall UK market given their prominent positions in the FTSE 100.”
Committee projections suggested that rates would go up three times each in 2018 and 2019, ultimately bringing the median rate target to 2.9 per cent.
Committee members forecast the US economy to grow by 1.9 per cent this year. Gross domestic product next year was put at 2.1 per cent, up from 2 per cent. The long-run growth rate stayed at 1.8 per cent. Inflation was predicted to hit 1.9 per cent, while unemployment to be 4.5 per cent by the end of 2017.
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The Dow Jones industrial average fell by 118.68 points to 19,792.53 and the S&P 500 eased by 0.8 per cent to 2,253.28.
The Bank of England’s monetary policy committee is expected to hold the base rate steady at its meeting today.
