Federal Reserve hikes interest rate, signifying confidence in improving US economy

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WASHINGTON — We officially have a Federal Reserve rate hike, the second increase in more than 10 years.

Fed officials ended their final meeting of 2016 by raising the federal funds rate — what banks charge each other for short-term loans — to a range of 0.50 percent to 0.75 percent. The Fed previously increased rates at the December 2015 meeting from a near-zero level, an unprecedented low that was set in 2008 amid the fallout from the housing bust and financial meltdown.

What does a Federal Reserve rate hike mean for you?

The sluggish recovery has meant that Fed officials delayed a rapid rate increase, helping to stimulate economic activity by making it cheaper to borrow money for things like a mortgage or car financing. The ten Fed officials voted unanimously for the rate hike, making it the first time since June that they all agreed.

Federal Reserve policymakers now expect to raise their short-term interest rate three times next year, up from just two, amid slightly faster growth. That means loans will have higher interest rates, possibly impacting future homebuyers and others looking to take out bigger loans. On the other hand, it also theoretically means savings accounts will earn higher interest, making you more money.

The increase represents a small turnaround for the Fed, which had cut its forecast for the number of hikes in 2017 in at least six previous meetings.

Fed officials maintained their outlooks for 2018 and 2019: they forecast three additional rate hikes each year.

By the end of next year, the Fed expects its short-term rate will be between 1.25 percent and 1.5 percent, and by the end of 2018, they forecast it will be between 2 percent and 2.25 percent. They see the rate between 2.75 and 3 percent by the end of 2019.