By Nick Timiraos
WASHINGTON-The Federal Reserve said it would raise short-term
interest rates for the third time this year and remained on track
to chart a similar path next year, signaling continuity as the
central bank enters a major leadership reshuffle.
Fed officials said they would increase their benchmark
federal-funds rate by a quarter percentage point to a range between
1.25% and 1.5%. Officials revised up their projections for economic
growth and said they expect to keep raising rates if the economy
performs in line with their forecast.
Officials didn't significantly change projections about the path
of interest rates or inflation even though they now expect the
economy to grow faster, and the labor market to tighten further,
than they did in projections released three months ago. Officials
penciled in three quarter-point rate increases for next year, as
they had in September, and two increases each in 2019 and 2020.
New projections show officials expect the economy to grow at a
2.5% rate this year and next, up from September projections of 2.4%
and 2.1%, respectively. The Fed still expects the economy will grow
at 1.8% over the long-run, and Wednesday's projections show
officials now expect economic growth will surpass that level
through 2020.
Officials didn't change their forecasts significantly around
inflation, even though they now project the unemployment rate to
fall to 3.9% in 2018 and 2019, down from prior forecasts of 4.1%
and below the level that they expect should prevail over the long
run, which was unchanged at 4.6%.
In its postmeeting statement, the Fed's rate-setting committee
described the job market as strong. "The committee continues to
expect that, with gradual adjustments in the stance of monetary
policy, economic activity will expand at a moderate pace and labor
market conditions will remain strong," the statement said.
Chicago Fed President Charles Evans joined Minneapolis Fed
President Neel Kashkari in casting dissenting votes Wednesday
because they wanted to hold rates steady.
The big question heading into their two-day meeting was how much
Fed officials expected to lift rates in coming years. The prospect
for new fiscal stimulus, combined with solid hiring and lofty asset
values, could argue for picking up the pace to prevent the economy
from overheating. But low inflation and modest wage growth could
support the case for sticking with a very gradual approach.
By Thursday, the Fed will have raised rates by a quarter
percentage-point five times since late 2015, after keeping them
near zero for seven years. In October, the Fed also started
shrinking its $4.5 trillion portfolio of bonds and other
assets.
Since officials last met in early November, Congress has moved
rapidly on legislation that would cut business and individual taxes
by around $1.4 trillion over the next decade. Before this week,
many Fed officials refrained from building into their forecasts
much prospect of fiscal stimulus because it wasn't clear what
Congress would pass.
House and Senate Republicans are reconciling different versions
of tax bills that have passed their respective chambers with the
goal of putting a unified plan before President Donald Trump to
sign by Christmas.
Fed Chairwoman Janet Yellen told lawmakers last month the Fed
wouldn't necessarily try to prevent the economy from growing more
quickly so long as fiscal policy changes spur productivity growth,
which has been historically weak over the past decade.
"Look, we welcome strong growth. The Fed is not trying to stifle
growth," Ms. Yellen said. "We're worried about trends that could
push inflation above our 2% objective."
Fed officials haven't said whether or to what degree they
believe the specific provisions of the House and Senate bills would
boost productivity, such as by encouraging capital formation and
new business investment.
That calculus will be especially important now that the
unemployment rate-at 4.1%, a 17-year low-is at or below the level
that many Fed officials believe will generate faster inflation.
It hasn't so far, presenting a challenge for the Fed.
On one hand, inflation has run below its annual 2% target most
of this year, reaching just 1.6% in October by the central bank's
preferred gauge.
Another inflation measure, released Wednesday morning, showed a
strong rise in energy prices but otherwise muted inflation in
November.
On the other hand, with the economy so strong and more stimulus
on the way, they don't want to hold rates too low for too long and
cause price pressures to surge out of control or fuel asset bubbles
and other financial imbalances.
Ms. Yellen told lawmakers last month modest wage increases and
sluggish inflation pressures suggest "the labor market and the
economy are not significantly overheated in spite of the fact that
we have a very low unemployment rate."
Ms. Yellen repeated her view last month that recent low
inflation readings reflect transitory factors and that as they
fade, inflation will return to 2%.
But she also nodded to the possibility that the Fed's
understanding of inflation is awry and that weak price pressures
"could reflect something more persistent," she said.
Fed officials also are wrestling with the fact that the economy
isn't responding to its rate moves as it did in the past, making it
harder to discern the right policy path.
Fed increases in short-term rates used to tighten credit more
broadly, causing bond yields to rise and boosting other borrowing
costs such as for mortgages, credit cards and business loans. This
year, instead, financial conditions have eased, with long-term bond
yields drifting lower, stock prices rising to new highs and many
consumer loan rates little changed.
Fed governor Jerome Powell is poised to take the lead on
confronting these challenges as Ms. Yellen's successor after her
term as chairwoman ends Feb. 3.
Mr. Powell was nominated last month to take the helm and is
awaiting Senate confirmation, but should face no difficulty after a
panel voted 22-1 last week to advance his nomination.
He has shown few signs of diverging sharply from Ms. Yellen on
monetary policy but has indicated he could offer a lighter touch on
financial regulation.
Ms. Yellen has said she would resign her seat on the Fed's
seven-member board once her successor takes over, which would make
her the third governor to leave within a year.
Mr. Trump has filled one vacancy on the board and moved to fill
a second one, in addition to nominating Mr. Powell to become
chairman. Mr. Trump has two more openings to fill now and will have
another after Ms. Yellen leaves next year.
(END) Dow Jones Newswires
December 13, 2017 14:15 ET (19:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.