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The Fed Lifts Off, Slowly

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In the months after the U.S. Federal Reserve first began pulling back on the greatest stimulus in its history, the question had been, when would it act again?  On Dec. 14, the Fed’s policy-making committee finally nudged rates higher for a second time, almost exactly a year to the date when it last voted in favor of “liftoff,” the first increase in its interest rate target. Officials at the central bank have envisioned rates slowly creeping upward in a way that puts the economy near full employment with inflation averaging around 2 percent. That creeping turned out to be slower than originally thought. The bank had pushed the federal funds rate target to near zero after the 2008 financial crisis. Before the first increase in December 2015, former Fed Chairman Alan Greenspan predicted: “There is no conceivable scenario in which it is going to be easy.” Then came Donald Trump's election as U.S. president in November.

The Federal Open Market Committee voted to raise the target for the fed funds rate — the overnight lending rate between banks — to a range of 0.5 percent to 0.75 percent. It had set the stage for a second rate move in its Sept. 21  and Nov. 2 decisions, but Trump’s victory raised potential complications. He vowed to rewrite economic policy and tear up existing U.S. trade agreements and had been seen by investors as less predictable than his Democratic opponent, Hillary Clinton. Before the Nov. 8 election, the FOMC had released statements saying the case for another hike had gotten stronger, along with forecasts in September that pointed to one quarter-point increase in 2016 and two hikes in 2017. In December, policy makers' forecasts projected three quarter-point hikes in 2017 and a higher overall trajectory for rates than they had in September. A year earlier, when the FOMC voted to establish a target range for the fed funds rate of 0.25% to 0.5%, the FOMC’s median estimate had implied four quarter-point hikes each in 2016 and 2017.