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ECONOMY

Fed makes first rate hike in 2017, still eyes two more increases this year

A nearly unanimous Federal Open Market Committee agreed Wednesday to increase the federal funds rate by 25 basis points to a 0.75% to 1% range, echoing a move made in December that also raised rates by 25 basis points.

The decision was based on both realized and expected labor market conditions and inflation, the committee said in a statement.

One FOMC member, Neel Kashkari, president and CEO at the Federal Reserve Bank of Minneapolis, voted against the move, preferring to maintain the existing target range.

Data received since the FOMC meeting in February indicate that “the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months,” the committee said in a statement.

“Inflation has increased in recent quarters, moving close to the committee's 2% longer-run objective,” the statement said.

FOMC predictions for future rate hikes remained basically unchanged, with members expecting two more hikes in 2017 and three in 2018. “That's why you see the relief rally in the bond market,” said Thanos Bardas, managing director and global head of sovereigns and interest rates at Neuberger Berman. Mr. Bardas saw today's statement as dovish because FOMC members did not add an extra hike into their projections.

Comparing the FOMC and the bond market as dance partners, “now it is probably the first meeting that the Fed took the first step and the bond market followed,” he said in a telephone interview. “The market is still below the Fed in terms of expectations for hikes. There's room for the market to move closer to the Fed.”

At a press conference following the meeting, Chairwoman Janet Yellen said “the federal funds rate does not have to rise all that much to get to a neutral level,” but added that, “even so, it is still likely to remain low” for some time.