Feds up interest rates for the third time in 6 months

As predicted by most economists, and government observers, the Federal Open Market Committee of the Federal Reserve Board approved on Thursday a rate hike of 25 basis points from 1 percent to 1.5 percent, in a move that Fed Chair Janet Yellen attributed to growing confidence in the U.S. economy. And, an outlook for the GDP of 2.2 percent, far less than the one President Trump has as a target, with his budget proposal.

With many saying that this was on target, it is also expected to offer a bit of a bump to consumer debt in the form of, adjusted rate mortgages, and revolving credit card debt, and home equity loans.

Traditionally, the prime rate will also increase for baseline interest rates, following this rate increase.

The Committee noted in their statement that “Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent.”

In a prudent, and cautious vein, characteristic under Yellen’s rein,  they felt “In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-¼ percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.”

As has been often noted the Fed mandate is to reach the goals of maximum employment and price stability, a feat that in the last few years had proven to be difficult, and Yellen herself has chosen the prudent course. But, the sentiment of the FOMC does represent a slight departure from the traditional notion of an inflation target of 2 percent, they were, in fact, and were willing to look at one that was just below 2 percent; a change that may reflect a nod to an economy that has not always been on a predictable path, even among Keynesians.

Then there is the psychological beliefs of consumers, as Chris Gaffney, the president of EverBank World Markets noted: "You may start to see it weigh on consumer confidence in that they believe interest rates would continue to increase, which would make their [borrowing] more expensive.”

In a view not always held by other, he also said that "If we continue to not see any inflation, we could start to perhaps see it impacting their rate decisions going forward."

The Consumer Price Index was one blot on another wise rosy report, was weaker than expected, and caused some to side with Gaffney that this might be the last raise this year. In short the fault lay with weaker gas prices, and also costs for shelter, clothes and, vehicles. Personal consumption was only at 1.7 percent.

The job growth touted by the FOMC was moderate and added 100,000 jobs, but still reflected low labor force participations, just under 63 percent, and wages at 2.5 percent, hardly a cause for rejoicing, but one that seemed steady enough after the Great Recession,and okay for the Feds, as was the 4.3 percent unemployment.

But, the real news was the spin off of the heavily held balance sheet of market based securities and Treasury bonds, that many in Congress, especially GOP lawmakers objected to. While no deadline, was given, the Feds noted that they would start on a timetable that would begin to unwind, without reinvestment in the securities that they hold.

As Business Insider described it: “To shrink its nearly $5 trillion balance sheet, the Fed plans to gradually allow a fixed amount of the assets it owns to roll off, meaning it won't reinvest them. The Fed amassed bonds after the financial crisis to help keep interest rates low. Initially, up to $6 billion in Treasurys and $4 billion in mortgage-backed securities will be allowed to roll off monthly.

These caps will be raised every three months until they hit $30 billion for Treasurys and $20 billion for mortgage-backed securities. There was no indication of when this process would begin.