The Federal Reserve’s top policy-making body on Wednesday hiked interest rates for the second time this year, despite signs that the economy isn’t overheating.
Citing the “realized and expected” unemployment and inflation rates, the central bank moved forward with the expected increase of its main borrowing rate to between 1 percent and 1.25 percent, and it is telegraphing that it will raise rates once more this year.
The Fed’s borrowing rate affects interest payments on everything from mortgages to auto loans to savings accounts.
After weeks of data showing flagging inflation growth, the Federal Open Market Committee, in a statement following meetings this week, said it is “monitoring inflation developments closely” and adjusted down its expectations for how much prices will grow this year to 1.6 percent.
The path of inflation is key for the Fed, which aims to pump the brakes on the economy through interest-rate hikes when there is a danger of prices rising precipitously. Its annual inflation target is about 2 percent.
The central bank also provided more clarity on how it will begin to shed trillions of dollars in securities that it has purchased to prop up the economy since the financial crisis. For the first time, the committee said it expects to start reducing its portfolio this year, assuming the economy stays in line with its expectations.
The Fed said it plans to initially allow $6 billion of its $2.5 trillion in Treasuries to mature each month without replacing them. Every three months, the amount of Treasuries that it lets roll off its balance sheet will increase by $6 billion until that figure reaches $30 billion.
It will do the same with its $1.8 trillion in mortgage-backed securities, only starting with $4 billion and increasing by $4 billion every three months, with a ceiling of $20 billion. The Fed does not say when it will stop shrinking its asset holdings.
The central bank says it will allow its securities holdings to decline until it decides it is “holding no more securities than necessary to implement monetary policy efficiently and effectively.”
The only Fed official to vote against hiking rates was Minneapolis Fed President Neel Kashkari.