Fed Raises Rates - Removes "Accommodative" from Policy Language

Today the US Federal Reserve Open Market Committee (FOMC) raised their Fed funds interest rate by 0.25% to a new range of 2.00% to 2.25%. As my chart below shows, this new rate is still low by historical standards.

The Fed will also increase its balance sheet reduction (reverse QE) by another $12 billion per month:

The Committee directs the Desk to continue rolling over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during September that exceeds $24 billion, and to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during September that exceeds $16 billion. Effective in October, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing during each calendar month that exceeds $30 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.

The US Stock markets liked the move because it signals that the economy is still strong.

Had the FOMC not raised rates, perhaps under political pressure from President Trump who likes low rates to stimulate GDP growth, the markets could have take in as a sign of weakness in the US economy.

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The FOMC also increased their estimate for GDP growth for 2018 and 2019 since the last meeting.

More information:

• Federal Reserve Press Release (PDF)
• Policy Statement
• Economic Projections (pdf)
• Meeting calendars, statements, and minutes (2013-2018)