Fed raises interest rates, sets plane to reduce balance sheet

For the second time this year,  the Fed hiked interest rates, in a widely expected move that reflects the central bank's confidence in the U.S. economy.

After two-day meeting on Wednesday, the Federal Reserve’s Open Market Committee raised their benchmark interest rate by 25 basis points to a range of 1% to 1.25%.

The move was essentially a foregone conclusion and the market was pricing in a 99% chance of a rate hike, according to CME Group's FedWatch tool. The decision was supported by everyone on the Fed's committee except Neel Kashkari, who wanted to leave rates unchanged. Kashkari, who has been tipped as a potential successor to the current chair, Janet Yellen, has consistently warned against raising rates, fearing that it might harm the recovery. “We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains,” Kashkari wrote after objecting to a rate rise earlier this year.

The level impacts most adjustable-rate and revolving debt like credit cards and home equity loans. The prime rate that banks use as a baseline for interest rates usually rises immediately after the Fed makes a move.

The Fed accompanied the widely expected rate increase with a further show of confidence: a description of its plans to start reducing its portfolio of more than $4 trillion in bonds later this year. The Fed intends both measures to raise borrowing costs for businesses and consumers after almost a decade of historically low interest rates.

“Our decision reflects the progress the economy has made and is expected to make,” Janet L. Yellen, the Fed’s chairwoman, told reporters after the announcement.

The central bank now believes inflation will fall well short of its 2 percent target this year. The post-meeting statement said inflation "has declined recently" even as household spending has "picked up in recent months," the latter an upgrade from the May statement that said spending had "rose only modestly." The statement also noted that inflation in the next 12 months "is expected to remain somewhat below 2 percent in the near term" but to stabilize.

The central bank also cut its inflation forecast for 2017 to 1.6% from 1.9% as measured by the PCE index. And it predicted U.S. unemployment would end the year at 4.3% instead of its previous 4.5% forecast. The Fed said the U.S. economy is growing "modestly so far this year."