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Fed raises key rate and unveils plan to reduce bond holdings

WASHINGTON — The Federal Reserve has raised its key interest rate for the third time in six months, providing its latest vote of confidence in a slow-growing but durable economy. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.

The increase in the Fed’s short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers. The Fed foresees one additional rate hike this year but gave no hint of when that might occur.

The overarching message the Fed sent Wednesday was an upbeat one: It believes the U.S. economy is on firm footing as it enters its ninth year of recovery from the Great Recession, with little risk of a recession. Though the economy is growing only sluggishly and though inflation remains chronically below the Fed’s 2 percent target, it foresees improvement in both measures over time.

And the most important pillar of the economy — the job market — remains solid if slowing, with unemployment at a 16-year-low of 4.3 percent — even below the level the Fed associates with full employment.

The Fed’s decision to raise rates, announced in a statement after its latest policy meeting, was approved 8-1, with Neel Kashkari, head of the Fed’s Minneapolis regional bank, dissenting in favor of holding rates unchanged.

The announcement that the Fed plans to begin paring its balance sheet later this year — “provided that the economy evolves broadly as anticipated” — involves its enormous portfolio of Treasury and mortgage bonds.