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Federal Reserve Raises Interest Rates by 1/4%

The Federal Reserve on Wednesday raised a key U.S. interest rate for the first time in a year and signaled a more aggressive approach in 2017, when incoming president Donald Trump plans a full-throttle strategy to jack up the American economy

In a widely expected move, the central bank raised its key short-term rate to a range of 0.5%-0.75% from 0.25% to 0.5%. The vote was unanimous.

At the same time, the Fed’s so-called “dot plot” showed the central bank has now penciled in three rate hikes in 2017 instead of two under its prior forecast.

Although Chairwoman Janet Yellen called the shift “very tiny,” she acknowledged some Fed officials took President-elect Trump’s economic plan into account when making their forecast. Still, she suggested that higher inflation and a lower unemployment rate than the Fed had expected were bigger factors in the change.

What’s more, she stressed the Fed would take a wait-and-see approach for now since the outlines of Trump’s plans are hazy.

“I wouldn’t want to speculate until I were more certain of the details and how they would affect the likely course of the economy,” she said.

U.S. stocks SPX, -0.81%  rose briefly after the Fed decision before turning sharply lower to end the day. Still, stocks have rallied to record highs since Trump’s surprise victory and interest rates have also risen. Yellen noted that Wall Street is expecting fiscal policy to be more stimulative in 2017.

Some economists think the tax cuts and increased spending plans put forward by the Trump team may trigger higher inflation and force the central bank to raise rates more aggressively.

Others think the Fed may be able to accommodate some stimulus without reacting sharply.

Fed officials did not give many hints in their latest forecast for the economy. They still expect GDP growth to average 2% over the next three years. And they predict the unemployment rate will stay close to 4.6% rate seen in November.

Yellen implied the Fed doesn’t expect the labor market to show much more improvement, however, and that more stimulus from Washington probably isn’t necessary.

“I would say the labor market looks a lot like the way it did before the recession,” Yellen said.

 

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