As was widely anticipated, members of the Federal Open Market Committee at the Federal Reserve chose to raise the target range for the federal funds rate from 1 percent to 1.25 percent on Wednesday.

While the vote to raise the rate was nearly unanimous, one FOMC member earlier raised concerns about the economic trends that often influence the committee’s decisions — and how subprime auto financing might play a role.

Back on May 30, Lael Brainard delivered remarks to the New York Association for Business Economics in a speech titled, “Navigating the Different Signals from Inflation and Unemployment.” That’s when Brainard touched on the credit given to consumers with soft credit histories so they can secure transportation.

“One area that merits ongoing vigilance is corporate indebtedness, which remains at a high level and where investor appetite still seems strong,” Brainard said. “Another area of concern is auto lending — particularly in the subprime segment — where underwriting appears to have become quite lax last year and, consequently, delinquency rates indicate more borrowers struggling to keep up with their payments.

“Eight years into the recovery, it is important to recognize that financial conditions can change rapidly and bear special vigilance. Nonetheless, risks to the U.S. financial system do not appear to be flashing red in the way they did in the run-up to previous downturns,” she continued.

Without those flashing red risks that Brainard referenced, the FOMC voted 8-1 to proceed with the rate hike with only Neel Kashkari of the Minneapolis Fed voting for the rate to remain unchanged.

In a statement announcing the decision, the FOMC reiterated that its statutory mandate revolves around fostering maximum employment and price stability. Members are expecting that economic activity will expand at a “moderate pace,” and labor market conditions will “strengthen somewhat further.”

While making a quarter-percent increase back in March, the FOMC passed on an uptick last month. Wednesday’s move represents the second increase this year and third in the past seven months.

“In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation,” the members said in a statement. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” they continued. “The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

“However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” they added.

Expert reaction to rate rise

The analyst team at S&P Global Ratings also began its assessment of the Fed’s actions by calling the rate hike “as broadly anticipated.”

S&P Global Ratings said the firm continues to expect one more rate rise of 25 basis points in 2017.

“The Fed also outlined details on balance sheet normalization, stating it intends to start the unwinding process this year if the economy evolves as anticipated,” S&P Global Ratings analysts said. “The Fed didn’t provide an exact start date or the optimal size of the balance sheet at the end of the normalization process, but it did provide how it would taper reinvestments.

“All indications from the FOMC statement, forecasts and chairwoman (Janet) Yellen’s press conference are that the FOMC will take a ‘gradual’ approach and will remain data-dependent,” they added.

Stifel Fixed Income chief economist Lindsey Piegza looked to explain why the FOMC made this move coming off of what she described as additional “soft” inflation data released this week.

“The Fed’s decision to move forward with a second-round increase this year appears to be motivated by both a push from the market with today’s rate hike fully priced in, according to Bloomberg, as well as a desire to rebuild the monetary policy tool kit,” Piegza said.

“Justification from the data, on the other hand, as the economy shows lingering signs of weakness carrying over from the first-quarter amid still-sluggish consumer activity, modest labor market gains and cooling inflation, appears to be the missing component that would normally be at the forefront of an accelerated rate path,” she continued.

“In other words, the Fed’s decision to raise rates today, while expected, appears to be little motivated by the data, leaving the future pathway for rates even more uncertain at this point,” Piegza went on to say.

Piegza also touched on what else policymakers said in connection with Wednesday’s rate action.

“Acknowledgement of the recent decline in prices within the statement as well as with a modest downward revision to the forecast, however, appears to be taking a backseat to the Fed’s general optimism for improvement in growth and inflation,” she said.

“Without sizable and clear additional weakness, the Fed appears steadfast in their commitment to one additional rate hike this year. Once again, the Fed’s credibility is on the line as the data argues for quite an opposite position,” Piegza went on to say.

Comerica Bank chief economist Robert Dye focused much of his analysis on the addendum to the Fed’s policy normalization principles that he said “gives us a little deeper view into balance sheet reduction.”

Dye continued with, “Once the program gets started, the Fed will continue to reinvest maturing assets only to the extent that the dollar total exceeds gradually rising caps. So the cap represents the amount of asset reduction per month.”

Dye explained that the Fed expects to start the cap on the reinvestment of maturing Treasury bonds at $6 billion per month and increase that in steps of $6 billion per quarter over 12 months until it reaches a final cap of $30 billion per month. He continued that the cap on the reinvestment of agency debt and mortgage-backed securities will start at $4 billion per month and increase in steps of $4 billion quarterly over 12 months until it reaches $20 billion per month.

Also referencing Yellen’s press conference, Dye recapped that Yellen said that the Fed had not yet determined the final size of the balance sheet, “but that it would be larger than the roughly $1 trillion size that it was prior to the financial crisis.”

Dye added, “(Yellen) also declined to say how long it would take to get there. She described the balance sheet reduction plan as working in the background while fed funds interest rate policy would remain the primary mechanism for monetary policy changes.

“Yellen would not say specifically when balance sheet reduction will start, but she reinforced previous Fed statements suggesting that it will start before the end of this year. She made her most forceful comment yet on the starting point for balance sheet reduction saying that it would happen ‘relatively soon,’” Dye concluded.