The Federal Reserve increased short-term interest rates by 25 basis points Wednesday as both inflation and the labor market improve, but the central bank countered speculation that the pace of increases this year might accelerate.
Wednesday's move, only the third hike since the Fed trimmed rates to nearly zero during the 2008 financial crisis, boosted rates to a range of 0.75% to 1%. It stands to benefit banks from JPMorgan Chase (JPM) to Wells Fargo (WFC) , which typically goose interest income by passing on hikes more quickly to borrowers than to depositors.
"Waiting too long to scale back some accommodation could potentially require us to raise rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and pushing the economy into recession," Fed Chair Janet Yellen said during a news conference after the monetary policy committee's meeting.
Committee members maintained their projection of two more hikes this year, which could take rates to a range of 1.25% to 1.5%, tamping down speculation that more rapid economic gains might prompt it to try for four increases.
"The Fed had the opportunity to be more hawkish today if they wanted to, and they weren't," Mike Baele, U.S. Bank Private Client Reserve managing director, said in a phone interview.
"The market is breathing a little bit of a sigh of relief," he added. "That helps explain why stocks move modestly higher."
The S&P 500 rose 0.84%, the Dow Jones Industrial Average increased 0.54%, and the Nasdaq moved higher by 0.74%.
Yellen suggested that the pace of hikes would remain "gradual," though she didn't specify exactly what number per year that might mean. Over a decade ago, "when rates were raised at every meeting, I think people thought that was a gradual pace, measured pace, and we're certainly not envisioning something like that," she said.
While the yield on the 2-year Treasury bond declined from 1.38% to 1.3% Wednesday, Bryce Doty, senior portfolio manager at Sit Investment Associates, said further hikes during 2017 and an additional three in 2018 will likely push yields up. Investors typically seek a bigger premium for notes when they expect rates on later issuances to be higher.
"I would be a contrarian at this point," said Doty, who's responsible for $7 billion in taxable bonds. "I would sell bonds after looking at today's market reaction with bond prices going up and yields going down. Seems counter-intuitive. I understand the relief rally that has pushed bond prices up and bond yield down, but I think it's going to be short-lived."
The Fed's decision was underpinned in part by an improving labor market, reflected in a government report last week that showed U.S. employers adding 235,000 positions during February, while the unemployment rate fell to 4.7% and wages grew.
Personal consumption expenditures, or PCE, a gauge of prices that consumer pay for goods and services, rose 1.9% in January, closer to the Fed's inflation target of 2%.
The central bank didn't signal any change Wednesday on the handling of its $4.5 trillion balance sheet, noting that it will continue to roll maturing investments into new securities.
The Fed now expects median economic growth of 2.1% this year, with the median unemployment rate dropping as low as 4.5% and inflation holding steady at 1.9%.
While the timing and amount of government spending that President Donald Trump has promised as part of efforts to boost the economy has yet to be finalized, Baele said the Fed clearly didn't see a need to wait for further details.
"The conventional wisdom a month ago was that the Fed wasn't inclined to move until it had a clear vision of what the fiscal stimulus might be," Baele said. "The Fed is basically saying that the data has been good enough that we think it's appropriate to move regardless."
Minneapolis Fed President Neel Kashkari was the only committee member to vote against Wednesday's shift, preferring to leave rates unchanged. The monetary policy committee's next meeting will begin May 2.
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