Fed increases federal funds rate by 0.25%, releases economic projections

The Federal Open Market Committee increased the federal funds target rate by 0.25% to a range of 1.25% to 1.5%. The committee also released projections on the economy and federal funds rate.

The federal funds rate, or the rate banks charge each other for overnight loans, is used to determine the interest rate one would receive on a loan. In June, the Fed increased the rate to the previous range of 1% to 1.25%.

Since the committee met in November, the labor market continues to improve and economic activity has increased. “Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further,” according to a statement from the committee. “Household spending has been expanding at a moderate rate and growth in business fixed investment has picked up in recent quarters.”

Excluding food and energy, inflation on an annual basis declined this year and is less than 2%. Wage inflation remains low, and expectations of longer-term inflation have slightly changed. The committee’s goals are to achieve maximum employment and 2% inflation.

While the hurricanes and rebuilding efforts have disrupted the economy, employment and inflation over the past few months, this hasn’t “materially altered the outlook for the national economy,” according to the committee. The committee expects inflation to reach 2% over the medium term. According to the committee’s economic projections, the median projection for the economy to reach 2% inflation is 2019. In the longer run, inflation is expected to remain 2%. Between 2018 and 2020, the median projections for the federal funds rate are 2.1%, 2.7% and 3.1%, respectively. In the longer run, the federal funds rate is expected to be 2.8%.

The next committee meeting is set for Jan. 30-31.