Arthur J. Villasanta – Fourth Estate Contributor
Washington, D.C., United States (4E) – The Federal Reserve on June 13 raised its benchmark federal funds rate by a quarter-point to a range of 1.75% to 2% because of rising inflation and steady economic growth. It said the rate hike means consumers and businesses will pay higher loan rates over time.
The federal funds rate helps determine rates for mortgages, credit cards and other borrowing. The higher federal funds rate makes it more expensive for banks to borrow money, which will result in higher borrowing rates for consumers.
Mortgage rates have been steadily rising, however, which calls into question the Fed’s timing of the rate hike. The average rate on a 30-year fixed rate mortgage jumped to 4.66% this year in May, the highest in seven years.
Analysts said the rate hike is due to the economy’s resilience and a strong job market. It’s the second time this year the Fed has raised rates while indicating the Fed might step up its pace of rate increases.
It was the Fed’s seventh rate increase since it began tightening credit in 2015, and followed an increase last March. The Fed now foresees four rate hikes this year, up from the three it had previously forecast. It left its short-term rate unchanged when it last met in May.
The Fed, however, warned that if inflation eventually increases, it might move to tighten credit more aggressively. Its decision reflected an expanding economy. Unemployment is 3.8%, the lowest since 2000, but inflation is rising. The Fed’s policy is to rates gradually to keep the economy from overheating.
“The main takeaway is that the economy is doing very well,” said Chairman Jerome Powell. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”
Powell said the Fed will be worried if inflation either persistently overshoots or undershoots the 2% target. He said inflation can “bounce around” over time, especially with a spike in global oil prices likely to raise prices.
The Fed’s measure of inflation removes food and energy prices. This measure rose in May to 2.2% and saw the biggest annual increase in six years. The Fed projects inflation higher than 2% over the next two years.
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