The Real Deal New York

Fed expects to raise interest rates more aggressively in 2017

Central bank projects federal funds rate to hit 1.4% next year
December 14, 2016 03:31PM

Janet Yellen

The Federal Reserve on Wednesday raised interest rates for the first time in 2016 and also indicated it will raise short-term interest rates more aggressively in 2017 than initially planned.

It now expects the federal funds rate, a short-term benchmark rate for overnight interbank loans, to rise to 1.4 percent next year, up from a September estimate of 1.1 percent. With Wednesday’s hike, the central bank expects that rate will likely end this year at 0.6 percent, CNBC reported.

The hike, only the second one since the central bank cut borrowing cuts to almost zero in 2008, was widely expected by forecasters. Federal Reserve officials project three quarter-point rate increases in 2017 and three quarter-point rate increase in 2018, according to Bloomberg.

The central bank said in a statement that a quicker move to trim rates was warranted given that inflation had moved closer to the 2 percent target and that unemployment had fallen to a nine-year low in November. President-elect Donald Trump’s economic plan to greatly increase infrastructure spending and offer large tax-cuts creates some uncertainty for the central bank.

Higher short-term interest rates typically spill over into higher long-term rates, which raises the cost of real estate financing and pushes cap rates up, putting downward pressure on real estate prices. [CNBC, Bloomberg]Konrad Putzier