The Federal Reserve on Wednesday lifted its key interest rate from 1.5 percent to 1.75 percent, the highest level since 2008.
The move, the central bank’s first major decision under new Chairman Jerome H. Powell, was widely expected as the U.S. economy continues to strengthen and stock markets remain near record highs. The Fed also significantly boosted its forecast for U.S. growth this year and next. The U.S. economy is on track to expand 2.7 percent this year and 2.4 percent in 2019, Fed officials now say, a jump from the prior projection done before the Republican tax cuts were finalized.
“The economic outlook has strengthened in recent months,” the Fed said in its statement Wednesday. The Fed’s policy committee still met despite the snow that shut down most of Washington D.C.
The Fed anticipates hiking rates three more times in 2018, part of an ongoing move away from the extraordinary measures it took to stimulate the economy during and after the great recession, but it opened the door to potentially doing four hikes. The higher rates are likely to be welcomed by savers, but not by borrowers who will face more expensive loan terms going forward.
Americans should expect even faster growth and lower unemployment ahead, Fed officials said. Unemployment is now expected to fall to 3.8 percent this year and 3.6 percent in 2019, which would be the lowest level in decades.
There’s growing concern among economists that the GOP tax cuts and the additional boost in federal government spending could cause the U.S. economy to overheat, requiring the Fed to hike rates even more than three times this year. Of the 15 Fed board members, six anticipate the Fed will hike four times this year and one believes five hikes will be necessary. It’s not quite enough to tip the official forecast to four rate increases, but it’s getting close.
“I think they will end up tightening four times this year, but they don’t have to signal that yet,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
The Fed hasn’t hiked rates four times in a year since 2006.
Rising interest rates are typically good for savers, who are likely to receive higher interest on the savings they have in the bank. Borrowers, however, face higher costs when they go to get a mortgage, auto loan or small business loan. Americans with credit card debt are especially vulnerable to rising interest rates. The average credit card rate is already a full percentage point higher than it was a year ago and is likely to jump up more this year as the Fed hikes rates further.
While Wednesday’s move brings U.S. interest rates to the highest levels in a decade, they are still far lower than the historic norm of about 5 percent.