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Economy

Fed unanimously raises rates by 25 basis points, cites strengthening economy

Members of the Federal Open Market Committee met market expectations Wednesday by raising the federal funds rate 25 basis points to a range of 1.5% to 1.75%.

The vote was unanimous among the eight members attending the two-day meeting, who cited a strengthening labor market and moderately rising economic activity as the reason for the hike.

FOMC members also voted unanimously to approve a 25-basis-point increase in the primary credit rate to 2.25%, which is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank.

FOMC member projections for 2018 remain at three interest rate hikes in 2018, following the first meeting chaired by Jerome Powell. "We are trying to take the middle ground" between accommodative monetary policy and raising rates, he said at a post-meeting press conference. "I wouldn't expect the committee's projections … to move quickly."

"It could change up, it could change down. The path could be a little less gradual or a little more gradual," Mr. Powell said.

Janelle Woodward, global co-head of income strategies at BMO Global Asset Management, said in an interview: "The one thing that we will watch is that as we accelerate, does the target rate do anything on growth? There is enough underpinning and economic strength to support the path they've been on. It does say that the Fed thinks there's some legs to this."

The FOMC statement noted that recent data show modest growth rates of household spending and business fixed investment, down from strong fourth-quarter readings that led the committee to cite solid gains.

"That implies that they are looking at global growth and fiscal stimulus, (and they are) confident that the forward outlook is better," said Matt Toms, chief investment officer of fixed income at Voya Investment Management.

Mr. Toms noted that the announcement "is a very patient statement" reflecting Mr. Powell's desire to show continuity. Going forward, "I think you will see a slightly more direct tone, which could create more uncertainty," Mr. Toms said.

FOMC members increased their projections for when the federal rate would return to a normal, or neutral, level. "They do have it at 3.4% by 2020. The Fed is projecting getting into a less stimulative stance," said Mr. Toms.

More interesting than this latest rate hike "is that the Fed is predicting a slightly more aggressive round of hikes from here and interest rates settling at a higher level than they had planned," said James Athey, senior investment manager with Aberdeen Standard Investments. "The drip, drip effect of the strong U.S. economy is starting to trickle down to a more bullish Fed stance. This is likely to drive the dollar higher and lead to weakness in Treasuries."