No surprise here. As widely anticipated, the Federal Open Market Committee (FOMC) raised the key short-term federal funds interest rate by a quarter percentage point — to a range of 0.75 to 1 percent. It marks just the third time that the Fed has hiked rates since the 2008 financial crisis, with the most recent increase just three months ago.
After a decade of monetary policy intended to stimulate the economy, a return to normal is now underway — thanks to solid job gains and wage growth, rising consumer spending, and declining unemployment. About 200,000 jobs are being added per month, the unemployment rate has fallen to 4.7 percent, and many consumers are in better financial shape.
“The FOMC is more confident now about higher inflation than it was in early February, as inflation has moved closer to the committee's 2 percent target and should remain there,” said PNC Deputy Chief Economist Gus Faucher.
The Fed’s move prompted banks across the country — including PNC — to raise their prime lending rate for the third time in eight years. The prime rate influences rates for many types of short-term personal, small business and mortgage loans.
PNC’s prime rate will increase from 3.75 percent to 4 percent, effective March 16.
Confidence in the pace of economic growth, although moderate, may lead to more rate hikes this year. “Today, the FOMC said it expects that ‘economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,’” Faucher noted.
Mirroring the Fed’s rate forecast, PNC expects two more increases in the fed funds rate this year, in June and December. Three rate increases are forecasted to follow in 2018.
According to Faucher, the Fed’s economic projections released yesterday are little changed from December, with only the median inflation projection for 2017 bumped up a bit. Their forecast of 2.1 percent growth in GDP remains unchanged.
“It does not appear that FOMC participants are incorporating fiscal stimulus from the Trump administration into its forecasts,” he noted.
Stock markets weren’t shocked by the rate hike news, as they already were pricing in a 100 percent chance of an increase before yesterday's Fed meeting.
“U.S. stocks are reacting positively. Interest rate-sensitive sectors, such as utilities and real estate, and economically sensitive sectors, such as energy, industrials and materials, are outperforming,” said PNC Chief Investment Strategist Bill Stone. “We still remain optimistic on stocks based on better global economic momentum and earnings upside.”
Interest rate increases would most likely affect everyone in some way. For example, rates on short-term loans such as three-year car loans and some lines of credit and credit card debt will tick upward, but still remain at very low levels, according to Faucher.
Similarly, those with adjustable-rate mortgages will notice a rise in their interest rate. The effects on longer-term loans are less direct; however, the average rate on 30-year mortgages is up by about half a percentage point over the past year. Over time, as the Fed raises rates more, mortgage rates also may move up.
For savers, good news: They’ll earn a little more interest on savings account deposits and short-term CDs.
The FOMC is more confident now about higher inflation than it was in early February, as inflation has moved closer to the committee's 2 percent target and should remain there.
– Gus Faucher
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