Fed Raises Interest Rates, Signals 2 More Hikes This Year

By John Ydstie, National Public Radio

The Federal Reserve increased a key interest rate again Wednesday, which will trigger higher rates on credit cards, home equity lines and other kinds of borrowing.

But economists are wondering whether super-low unemployment will get policymakers nervous enough about potential inflation that the central bank will raise rates even higher in coming months than previously estimated.

Wednesday's action, which was widely expected, was the second Fed rate hike this year — and the seventh since it began boosting them in 2015. The latest increase puts the federal funds rate in a range between 1.75 and 2 percent. The Fed previously nudged up rates in March.

The Fed has signaled that it is likely to raise rates at least once more in 2018. But with the unemployment rate at 3.8 percent — a level reached only twice before in the past half-century — Fed Chairman Jerome Powell and his colleagues may decide additional rate hikes are necessary later this year.

Fed officials and many economists worry that the low jobless rate could force employers to hike wages faster, as companies compete for workers. That could spark higher inflation. At this point, there's been little evidence that wage or price inflation is accelerating.

The Fed has long aimed for 2 percent inflation, a level policymakers think is key to a healthy economy. But Berenberg Capital Markets economist Mickey Levy estimates that inflation is generally below where the Fed wants it to be, according to the latest economic data.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, says the Fed is "scared of future inflation risk." And these rate increases are addressing the "perceived threat of inflation," not an immediate inflation problem, he says.

Interest rate hikes will hit consumers in their wallets. Borrowers are likely to see higher bills next month on credit cards and mortgages, especially those with adjustable rates. Interest rates on new fixed-rate mortgages could also climb. The average 30-year fixed mortgage rate recently hit a seven-year high, before retreating a bit to 4.54 percent.