No shock: Fed boosts short-term rates

Amid signs of an improving economy, the Federal Reserve gave the go-ahead Wednesday to a much-expected rate hike, boosting the short-term federal funds rate by a quarter-point.

"The simple message is the economy is doing well," Federal Reserve chair Janet Yellen said at a news conference.

Wednesday's move is just the third rate hike since December 2015 — and that increase was the first since late 2006.

For consumers, experts say, now remains a good time to refinance adjustable-rate mortgages and lock in a fixed rate in the expectation that interest rates will only climb higher. And the impact on credit card rates will be swift, with consumers soon seeing higher rates on variable-rate cards.

For investors, the rate hike won't necessarily bring a slowdown to the stock market. But experts note that Wall Street has not seen a significant correction in more than nine months. So one can expect some decline ahead  in the normal course of investing.

But even though interest-rate increases can lead to short-term drops in the stock market, stocks had a fairly strong day of trading on Wednesday, as the Fed's move was well-telegraphed. The Dow Jones Industrial Average closed at 20,950.10 points, up 112.73 points.

The Fed boosted the short-term federal funds rate — the rate banks pay each other for overnight reserves — to a range that will run between 0.75% to 1%. Major banks on Wednesday then increased the prime rate from 3.75% to 4%.

The Federal Reserve had been on a path to lowering rates and keeping them low after the housing crisis and later, the financial meltdown of 2008-09. The Fed took rates to nearly 0% in December 2008.

Yellen said in a news conference Wednesday that a modest increase in rates is possible in light of the solid progress that has been made in the U.S. economy.

Many people are feeling more confident about the job market and more willing to quit jobs to take new jobs, Yellen said, acknowledging that less-skilled and less-educated workers are still finding it tough to find work in some areas.

What the Fed does not want to do is wait too long to raise rates and then be forced to raise rates rapidly to combat inflation. Rapid rate hikes risk disrupting financial markets and pushing the U.S. economy into a recession.

Bradley A. Wasserman, founder of Wasserman Wealth Management in Farmington Hills, said he'd expect at least two or three additional 0.25% rate hikes in the rest of the year.

The hikes, he said, can be viewed as positive signs that the economy continues to be strong and not headed into a recession.

"While it is difficult to predict the future, it is reasonable that the Fed will continue to increase short-term rates throughout 2018, if the economy continues to remain strong and there is an infrastructure plan enacted," Wasserman said.

David Sowerby, chartered financial analyst and vice president at Loomis, Sayles & Co. in Bloomfield Hills, said the stock market could continue to do well, given the strength of the U.S. economy and current low levels of inflation.

"As long as inflation is quite moderate, I think the stock market can reasonably absorb more interest-rate hikes," Sowerby said.

Investors, of course, need to be cautious and not too complacent.

"It is our opinion that the markets have likely gone up too fast in the wake of the Trump presidency," said Sam Huszczo, owner of SGH Wealth Management in Southfield. Longer term, he said, investors need to be concerned about inflation in the future. So it makes sense for the Federal Reserve to raise rates, he said.

The Federal Open Market Committee said in its statement that the labor market has continued to strengthen, and economic activity has expanded at a moderate pace.

Meanwhile, consumers have continued to spend, another positive sign for economic growth.

The Fed said it expects that U.S. economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate. But the Fed did not give many clues on future rate hikes in its statement, noting that the actual path of the federal funds rate will depend on the economic outlook and data.

Contact Susan Tompor: 313-222-8876 or stompor@freepress.com. Follow Susan on Twitter @Tompor.