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Research - JUNE 13, 2018

Fed increases rates 25bps

by Loretta Clodfelter

The Federal Open Market Committee raised the target federal funds rate by 0.25 percent at its June meeting, announcing the increase June 13. The widely expected move brings the target range for the federal funds rate to 1.75–2.0 percent.

In a statement, the FOMC pointed to both inflation and labor market conditions as supportive of the move, and noted, “Risks to the economic outlook appear roughly balanced.”

Many expect the Fed will increase rates two more times this year.

“The U.S. economy is performing in line with our expectations of above-trend growth further fueled by fiscal stimulus,” says Madhavi Bokil, a senior credit officer at Moody’s Investors Service. “We expect three to four rate hikes this year given that the economy is continuing to add jobs at a robust pace and price pressures are gradually rising.”

The labor market has been performing strongly, with the unemployment rate falling to 3.8 percent in May. Inflation has picked up in the past year, driven in particular by rising energy prices, but the FOMC has indicated a “symmetric” inflation objective, which suggests a willingness to tolerate inflation above 2 percent in the short term. The Consumer Price Index increased 0.2 percent in May, according to the Bureau of Labor Statistics and rose 2.8 percent during the past 12 months. With food and energy excluded, the CPI rose 2.2 percent during the past 12 months.

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