WASHINGTON, DC–It's here. The long-awaited federal funds rate increase is here.

On Wednesday, to the surprise of exactly no one, the Federal Reserve raised its benchmark interest rate to a range between 0.75% and 1% at its two-day policy meeting. This widely-expected rate hike was the second in three months and the third since the global financial crisis.

There was a long line of positive reports about the US economy preceding this decision, including most recently February's unemployment numbers in which some 235,000 workers were added to US payrolls — economists polled by Reuters had been expecting about 190,000 new jobs. Also, average hourly earnings rose 2.8%*.

And so Fed Chair Janet Yellen took the step that everyone had been expecting.

“We have seen the economy progress over the last several months in exactly the way we anticipated,” Yellen said in a press conference. “We have some confidence in the path the economy is on.”

There Were Some Questions

About the only tingle of uncertainty was over the Fed's formal statement about the rate increase. Would its tone be more aggressive than in previous statements? Would it signal that more rate increases than the already promised three this year and three next year were in the offing? In the days running up to the policy meeting there was much speculation that this might be the case. Another question of deep concern to economists was whether the Fed would continue to maintain the size of its $4.5 trillion balance sheet. Currently the Fed reinvests the proceeds from the Treasurys, mortgage-backed securities and other debt it accumulated under its quantitative easing policy but eventually it will have to start to unwind this debt. When it does, incidentally, it would likely have an even larger impact on mortgage markets than changes in the short-term rate target.

The Fed, though, stuck to its script of 'let's not scare the market half to death.'

Its outlook remained the same: there would be two additional rate increases this year and three more in 2018. Future rate increases would be “gradual,” and will not reach a neutral level until the end of 2019 even though inflation was nearing the Fed's 2 percent target range and could indeed surpass that target. Business investment had “firmed somewhat.” There was no change to its language about its intention to maintain the size of its balance sheet.

Mortgage Bankers Association Chief Economist Mike Fratantoni observed there was a “single, dovish dissent” on the decision to raise the federal funds rate from Neel Kashkari who preferred keep the target unchanged.

That duly noted, he continued.

“Given Chair Yellen's recent testimony and comment by other Fed officials, we expect a change to their balance sheet policy to be announced at some point this year,” he said. “Markets will likely react to this announcement, and not wait for the actual implementation of a change in balance sheet policy.”

* Savills Studley raised an interesting point in its Economic Pulse [PDF] about this particular statistic from the February report — namely that much of the increase came from lower-paying sectors. Employment in the leisure and hospitality sector has been responsible for 13% of the growth in private employment over the past 12 months but wages in this category are significantly below average, it said. Wage gains will eventually materialize, it predicted, “but the pressures are not being felt across all industries at this stage.”

WASHINGTON, DC–It's here. The long-awaited federal funds rate increase is here.

And so Fed Chair Janet Yellen took the step that everyone had been expecting.

“We have seen the economy progress over the last several months in exactly the way we anticipated,” Yellen said in a press conference. “We have some confidence in the path the economy is on.”

The Fed, though, stuck to its script of 'let's not scare the market half to death.'

That duly noted, he continued.

Instant Insights /

Parsing Janet Yellen's Cautious Tone

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