The Federal Reserve raised interest rates this week. Following the Federal open market committee meeting on Wednesday, chairperson Janet Yellen announced the federal bank would increase its benchmark rate for only the third time since the financial crisis of 2008.
The increase – 25 basis points to a range of 0.75%-1% – is based on the committee’s belief that the economy is recovering, the labor market is improving and inflation will increase.
“The economy continues to expand at a moderate pace,” says FOMC chairman Janet Yellen during a press conference on Wednesday. “Solid income gains and relatively high levels of consumer sentiment and wealth have supported household spending growth.”
Businesses have been the benefactors of that growth, Yellen says.
“Business sentiment is at favorable levels,” she says. “Overall, we continue to expect that the economy will expand at a moderate pace maintaining the solid pace we have seen over the past year.”
In addition, Yellen says the unemployment rate was near its recent low in February at 4.7%, showing the committee the labor market is improving.
“Looking ahead, we expect that job conditions will strengthen somewhat further,” she says.
Yellen says the committee tracks core inflation, which excludes energy and food prices, and which has not changed much in recent months. However, they expect core inflation to increase and overall inflation to stabilize around 2% over the next couple of years. That’s something she says is in line with the committee’s long-term objectives.
Rates Will Continue To Rise
“We continue to expect that the ongoing strength of the economy will warrant gradual increases in the federal funds rate, to achieve and maintain our objectives,” Yellen says. “The median projection for the federal funds rate is 1.4% at the end of this year, 2.1% at the end of next year, and 3% at the end of 2019.”