Fed Is Prepared to Take a More Aggressive Approach on Interest Rate Hikes to Keep the Economy Healthy

Fed Is Prepared to Take a More Aggressive Approach on Interest Rate Hikes to Keep the Economy Healthy - Fed Interest Rate Hike

By Gary Kasper, President at New Vista Solutions

The Federal Reserve raised the fed funds rate by .25% during its meeting in March — the first gathering under new Fed Chairman, Jerome Powell. This is the sixth rate hike since December 2015.

In a statement following the two-day Federal Open Market Committee (FOMC) meeting, the Fed said, “The economic outlook has strengthened in recent months”.

Despite investor expectations that the Fed would accelerate this year’s planned rate increases, committee members decided to stay on course with three planned interest rate hikes in 2018.

There was an indication, however, that the Fed could take a more aggressive approach to keep the economy on track in coming years. It increased the planned number of hikes for 2019 from two to three.

Following the FOMC meeting, policy makers said they expect inflation to surpass their 2% target next year and in 2020. When asked by reporters how the Fed would respond if inflation exceeded the 2% mark, Powell confessed there is currently no agreement in place regarding this scenario — but they are committed to taking whatever steps necessary to keep the economy from overheating.

The FOMC meeting minutes show a number of participants expect stronger growth and inflation in the next few years, suggesting rate hikes “would likely be slightly steeper than they had previously expected”.

Economists predict further growth resulting from tax cuts and the $300 billion spending bill recently passed by Congress — so inflation is a concern.

Powell stated, “There’s no sense in the data that we’re on the cusp of an acceleration in inflation. We’re very alert to it, but it’s not something we observe at the present.”

The Fed also predicts the unemployment rate to continue its downward trend, dropping from the current 4.1% to 3.8% this year. Powell, however, remains confident that a low unemployment rate will not contribute significantly to inflation.

The March meeting was the second of eight FOMC meetings scheduled for 2018. One thing is clear — Powell and his team of policy makers expect a steady climb in the fed funds rate as long as the economy stays on its current path.

Mortgage rates are sure to follow suit, making a strong case for home equity loans to be the best option for homeowners looking to borrow money. Home equity originations have been climbing steadily over the past eighteen months as consumers show little interest in refinancing out of their historically low mortgage interest rates.

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