By Nick Timiraos
WASHINGTON-The Federal Reserve said it would raise short-term
interest rates a quarter-percentage point and signaled it could
lift them at a slightly more aggressive pace in coming years to
keep the strengthening economy on an even keel.
Fed officials said they would increase their benchmark
federal-funds rate to a range between 1.5% and 1.75% and penciled
in a total of three rate increases for this year.
But more officials think they will need to raise interest rates
at least four times this year if the economy performs in line with
their expectations. Some seven of 15 participants now expect at
least four rate increases this year, an increase from four of 16
participants at the December meeting.
Most Fed officials also expect the Fed would need to raise rates
at least another three times next year. At the December meeting,
officials projected around two increases would be needed in
2019.
Officials also penciled in two rate increases in 2020, which
would leave them in a range between 3.25% and 3.5%.
"The economic outlook has strengthened in recent months," the
Fed's rate-setting committee said in its postmeeting statement.
The vote to raise interest rates at the meeting, the first led
by Fed Chairman Jerome Powell, was unanimous, with all eight
participants in favor of the rate increase.
The rate increase approved Wednesday was widely expected.
Traders in futures markets already anticipated the Fed would raise
rates a total of three times this year, and before the two-day
meeting ended Wednesday, investors placed a roughly 40% probability
on at least four interest rate increases this year, according to
CME Group.
Officials marked up slightly the estimate of interest rates they
expect to prevail over the long run, to a range between 2.75% and
3%. Because they now expect a slightly more aggressive path of rate
increases in the coming years, this means more officials now
anticipate they will need to tap harder on the brakes to cool down
the economy after next year.
Officials release their economic projections every quarter. The
new figures released Wednesday show they now expect inflation to
rise above their 2% target next year and in 2020. Inflation has
remained below that target for most of the last six years.
After a surprising deceleration last year that defied the Fed's
forecasts, inflation in recent months has firmed. Consumer prices
rose 1.7% in January from a year earlier, according to the central
bank's preferred inflation gauge. So-called core prices, which
exclude volatile food and energy categories, rose 1.5%.
Fed officials now see core inflation rising to 2.1% next year,
up from an earlier projection of 2%, and they see it staying at
2.1% in 2020.
An open question for Mr. Powell is how the Fed would respond to
inflation if it rises above the 2% target. Officials have said
their target is symmetric, meaning they are as willing to tolerate
periods of inflation slightly below the target as they are periods
when it rises slightly above the target.
But because inflation has run below the Fed's target since they
formally adopted it in 2012, markets don't have a good read on how
policy makers would chart interest rate policy when inflation is
above the target.
Officials also revised up their estimates of economic growth
this year and next year, likely reflecting an increase in federal
spending Congress approved last month. Officials in December
revised their growth projections higher because Congress was
nearing completion of a bill to cut taxes by $1.5 trillion over a
decade.
They now see the economy growing by 2.7% this year and 2.4% in
2019, versus earlier projections of 2.5% and 2.1%, respectively.
Their forecasts beyond that-2% growth in 2020 and 1.8% growth over
the long run-didn't change.
Because officials see the economy growing significantly faster
than the level they expect will prevail over the long run, the
forecasts imply officials see rising pressure on the economy's
productive resources, which could complicate their rate
decisions.
The big question heading into their two-day meeting was how much
Fed officials expected to lift rates in coming years, particularly
after lawmakers approved a more generous federal funding bill in
addition to cuts in corporate and individual tax rates at the end
of last year.
In February, Congress approved a $300 billion spending bill that
could add around 0.4 percentage point to gross domestic product
this year and next, on top of last year's tax cuts that could add a
similar boost to output over the same period.
Wall Street economists expect the measures will push
unemployment down to the low 3% range next year. U.S. joblessness
hasn't been that at that level since the Korean War, and no one is
quite sure what that could do to inflation or financial
stability.
Fed officials now project the unemployment rate, which has held
at 4.1% since October, will fall to 3.8% this year, down from 3.9%
in their December projection. They see it falling to 3.6% in 2019
and 2020, versus earlier projections of 3.9% and 4%,
respectively.
That would leave unemployment well below the level they see
prevailing over the long run. They marked down that forecast a
touch, to 4.5% from 4.6% in December. The revision indicates
officials believe there might be a little more labor slack than
previously estimated.
Since officials last met at the end of January, glimmers of
rising wages jolted financial markets, illustrating how investors'
anticipation of stronger price pressures and a shift in the Fed's
rate path might usher in more volatility in stock markets.
The Fed raised interest rates three times last year and began
allowing their large bond portfolio to slowly shrink.
Mr. Powell, in recent congressional testimony, indicated he had
turned more bullish on the economy since the start of the year.
"We've seen continuing strength in the labor market. We've seen
some data that will, in my case, add some confidence to my view
that inflation is moving up to target," he said. "We've also seen
continued strength around the globe, and we've seen fiscal policy
become more stimulative."
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(END) Dow Jones Newswires
March 21, 2018 14:15 ET (18:15 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.