WASHINGTON —As expected, the Federal Reserve has moved to raise its benchmark interest rate a quarter point to a range from 1% to 1.25%. It is the third consecutive quarter the Fed has nudged rates up.
The moves mean the Fed has now bumped up the benchmark interest rate by a full percentage point since 2015, indicating the Open Market Committee feel positively about the health of the U.S. economy into the near future. The economy has averaged 190,000 new jobs a month over the last two years.
In response to the Fed move, Mike Schenk, CUNA vice president of economics and statistics, said, “As expected, increasing concern over tight labor markets and the related risk of rising inflation pressures caused the Federal Reserve to increase the Federal Funds interest rate target. Policymakers shrugged off two data releases earlier in the day – one showing unexpectedly weak retail sales in May and one showing slower inflation – which had some wondering, in the final hours, if the move most expected would be put off. Despite the weakness reflected in those releases however, the Fed sees consumers as generally upbeat and engaged. Healthy labor markets are fueling personal income gains and boosting confidence.”
Nevertheless, policymakers are proceeding with caution, added Schenk.
“Expectations of economic stimulus arising from tax cuts and from increased federal infrastructure spending were baked in to most economic forecasts earlier this year,” he said. “However, with each passing day, both tax reform and additional spending on roads, bridges, and the like seem less certain. Fed decision makers will undoubtedly be following developments on this front very closely.”
Schenk said the FOMC statement suggests one more quarter-point statement in 2017, and three quarter-point moves in 2018.
In addition, policymakers re-affirmed expectations to begin implementing a balance sheet normalization program this year, he noted.
Meanwhile, in Dallas, Brian Turner, executive director with Meridian Alliance, noted the Fed is attempting to tighten monetary policy at a time when inflation is lower than expected.
“I don’t anticipate anything significant to happen with credit union pricing or current demand. Consumer loan rates are being tapped down because of weak to moderate demand,” said Turner. “Home sales are also tepid but more seasonal in its cause. Recently, the Federal Reserve reported that consumer credit expanded at a six-year low in April (2.6%) - despite rates remaining at relatively low levels.”
Turner added the increase in overnight and short-term rates will also have little impact on non-term share or term certificates.