Fed lifts rates, sees faster pace of hikes in Trump's first year

The U.S. Federal Reserve raised interest rates on Wednesday and signaled a faster pace of increases in 2017 as central bankers adapted to the incoming Trump administration's promises of tax cuts, spending and deregulation.The increase in the federal funds rate to a range of between 0.50 percent and 0.75 percent was widely expected. But the prospect of a brisker monetary tightening contributed to a selloff in shorter-dated U.S. Treasuries and stocks.

In a news conference following the unanimous rate decision, Fed Chair Janet Yellen said Donald Trump's election had put the central bank under a "cloud of uncertainty" and already prompted some policymakers to shift their view of what's to come. All the (Federal Open Market Committee) participants recognize that there is considerable uncertainty about how economic policies may change and what effect they may have on the economy. 

In forecasts released after its meeting, Fed officials also indicated that they could hike the fed funds target rate three times next year, instead of the two quarter-point increases previously forecast for next year. They also raised the forecast for future years to three hikes in both 2018 and 2019. Stocks traded sharply lower, while yields snapped higher. The 2-year Treasury yield, the most sensitive to the Fed, shot to a seven-year high of 1.27 percent. The dollar index also spiked, jumping 1.2 percent to 102.24. There's no mention of fiscal stimulus, so rate hike and the expectation for three next year — which is an increase of one hike — all reflects cumulative progress and expected progress against the dual mandate.

The Fed had been expected to act based on the economic data it has seen in recent months, and not the promise of tax cuts and fiscal stimulus proposed by the incoming presidential administration of Donald Trump. The Fed's mandates are controlling inflation, which has been stubbornly low, and reaching full employment.

With November unemployment at 4.6 percent, the Fed is close to full employment. The Fed also mentioned in its statement that market expectations of inflation are rising.

The Fed could also raise its outlook for rate hikes further, after it sees what specific actions Washington will take next year.
 

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Fresh economic forecasts, the first since Trump won the Nov. 8 election on promises of tax cuts and increased infrastructure spending, showed policymakers shifting their outlook to one of slightly faster growth, lower unemployment and inflation just under the Fed's 2 percent target.

The projected three rate increases next year would be followed by another three increases in both 2018 and 2019 before the rate levels off at a long-run "normal" 3.0 percent. That is slightly higher than three months ago, a sign the Fed feels the economy is still gaining traction.

Markets and the Fed appeared to be close on their rate outlooks, with Fed futures markets pricing in at least two and possibly three hikes in 2017.

The central bank continued to describe that pace as "gradual," keeping policy still slightly loose and supporting some further improvement in the job market. It sees unemployment falling to 4.5 percent next year and remaining at that level, which is considered to be close to full employment. The economy is projected to grow 2.1 percent in 2017, up from a previous forecast of 2.0 percent.U.S. bond yields had already begun moving higher following Trump's victory and as expectations of the Fed rate increase solidified.

Risks to the outlook remain "roughly balanced" between factors that could slow or accelerate the economy beyond what the central bank anticipates, the Fed said, no change from its assessment last month.The rate increase was the first since last December and only the second since the crisis, when the Fed cut rates to near zero and deployed other tools such as massive bond purchases to stabilize the economy.