After a two day meeting the Fed cited the “strong” jobs market and growth in household and business spending for its decision to raise rates a quarter point to a range of 1.25% to 1.5%.
In news that will be cheered by the Trump administration, the Fed also predicted stronger economic growth over the next three years. The Fed revised its forecast for growth in 2018 to 2.5%, well above its previous forecast of 2.1% estimate published in September.
The Trump administration is pushing through an ambitious $1.5tn tax package that it claims will be paid for by economic growth. At her final press conference Yellen said the Fed’s committee had discussed the Republican plan but that their revised growth estimates included other factors and “should not be viewed as an estimate of the impact of the tax package.”
Trump has said his tax package will increase growth to 4%, a figure Yellen described as “challenging”.
The decision was not unanimous. Two Fed board members, Charles Evans and Neel Kashkari, voted to leave rates unchanged. But Yellen’s replacement, Jerome Powell, signed up to the hike, continuing an unbroken record of voting with the Fed chair.
The rise is the fifth increase since the Fed cut rates to close to zero in the wake of the 2008 financial crisis. Yellen has overseen the Fed’s strategy of slowly returning to more normal interest rate levels and Powell is expected to oversee further rises in 2018.
The low rate policy was introduced in order to encourage investment after the financial crisis plunged the world into recession. The official unemployment rate is now 4.1%, a 17-year low, and the Fed expects that rate to fall below 4% by the end of 2018.
“Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further,” the Fed statement said.
“Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong.”
Yellen was appointed by Barack Obama in 2013 and has served just one term as Fed chair.
She is the first woman to have served as head of the central bank. Yellen was asked about the lack of diversity at the Fed and said the bank had struggled to broaden the background of its hires. “From my own experience I have found economics to be a terrific field,” she said.
Presidents have traditionally reappointed their predecessor’s Fed pick, but in November Donald Trump moved to replace Yellen with Powell, a former investment banker for the Carlyle Group and the richest member of the Fed’s board.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “It’s one final pull of the interest rate lever for Yellen as she departs from her position as chair. The move is a clear sign that the US economy is back on track to a full recovery. We are near full employment, domestic growth has been strong and the economy is benefitting from a synchronized global recovery.”
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