Economy Watch: Fed Sure of Economy, Raises Rates, Promises Asset Sell-Off

The Federal Reserve unanimously decided to raise rates for the second time in 2017, signaling its belief that the U.S. economy is strong enough to handle more expensive financing.
Janet Yellen, Chair of the Board of Governors of the Federal Reserve System (Photo by Paul Morigi)

Janet Yellen, Chair of the Board of Governors of the Federal Reserve System (Photo by Paul Morigi)

The Federal Reserve, for its part, seems to believe that the economy is strong enough for money to be more expensive, including real estate financing. Thus the central bank raised the Fed Funds rate on Wednesday by 25 basis points, to the range of 1 percent to 1.25 percent. Investors were not surprised, and pretty much any serious commercial real estate deal had the likelihood of higher rates accounted for, if funding hasn’t been obtained already.

The vote in favor of the hike was unanimous. The Federal Reserve is also likely to raise rates at least one more time this year, unless something unexpected happens to the economy (such as a blowup this year over the debt ceiling).

The Fed also said in its statement that it expects to begin shrinking its balance sheet starting sometime this year. The central bank bulked up its holdings to about $4.2 trillion in assets, including a lot of Treasury bonds and mortgage-backed securities, beginning during the dimmest days after the Panic of 2008 to stave off an even deeper depression.

In her press conference after the announcement, Fed Chair Janet Yellen asserted that U.S. economic growth appears to have rebounded enough to justify both higher rates and a return of Fed-held assets to the wider market. She noted that—among other things—stabilization in the labor force participation rate is signaling a stronger jobs market.