The US Federal Reserve raised interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank’s target.
The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 per cent to 1.00 per cent marked a convincing step in the Fed’s effort to return monetary policy to a more normal footing.
Fed Chair Janet Yellen pointed to growing faith in the economy’s trajectory.
“We have seen the economy progress over the last several months in exactly the way we anticipated,” Yellen said in a press conference following the end of a two-day policy meeting. “We have some confidence in the path the economy is on.”
The Fed also stuck to its outlook for two additional rate increases this year and three more in 2018. The central bank lifted rates once in 2016.
Stock markets extended gains and bond yields fell on the benign economic outlook and the continued steady path of rate rises signaled by the central bank. The dollar was trading lower against a basket of currencies.
Fed policymakers noted that inflation was now “close” to the central bank’s two per cent target, and that business investment had “firmed somewhat” after months of weakness.
However, they did not flag any plan to accelerate the pace of monetary tightening, with the policy-setting committee reiterating and Yellen emphasising that future rate increases would be “gradual.” At the current pace, rates would not return to a neutral level until the end of 2019.
Rather, the Fed’s statement said the inflation target was “symmetric,” indicating that after a decade of below-target inflation it could tolerate a quicker pace of price rises.
“It relieves some of the fears we’ve had that perhaps the Fed was going to raise rates faster in the future. They’ve chosen not to signal that,” said Brad McMillan, chief investment officer at Commonwealth Financial.
‘NOT A CEILING’
Labor groups have urged the Fed to raise rates as slowly as possible so hiring can continue and wage increases take hold.
US job gains have averaged 209,000 per month over the past three months, well above the 75,000 to 100,000 needed to keep up with growth in the working-age population. The jobless rate is 4.7 per cent, at or near a level consistent with full employment.
The Fed projected that the unemployment rate would fall to 4.5 per cent this year and remain at that level through 2019.
Yellen, who has consistently said that the Fed was better equipped to fight inflation than a fresh downturn or surge in joblessness, did not rule out inflation edging above target.
“This seemed like a good time to remind Americans that … sometimes it (inflation) is going to be below two per cent, sometimes it is going to above two per cent,” Yellen told reporters. “Two per cent is not a ceiling.”
Fresh economic forecasts released with the statement were largely unchanged from those of the December policy meeting and gave little indication the Fed has a clear view of how President Donald Trump’s policies may impact the economy.
“We have not discussed in detail potential policy changes that could be put into place and we have not tried to map out what our response would be,” Yellen said. “We have plenty of time to see what happens.”
She added that she had held meetings with Treasury Secretary Steven Mnuchin, and met with Trump once since he took office.
The Fed’s projections showed the economy growing 2.1 per cent in 2017, unchanged from its December forecast. The median estimate of the long-run interest rate, where monetary policy would be judged as having a neutral effect on the economy, held steady at 3.0 per cent.
Core inflation was seen as slightly higher at 1.9 per cent versus the previous 1.8 per cent forecast.
The rate increase came amid a broad improvement in the world economic outlook and a sense among Fed policymakers that the US economy is close to the central bank’s employment and inflation goals.
According to the policy statement, the risks to the outlook remained “roughly balanced.”
Minneapolis Fed President Neel Kashkari was the only official to dissent in Wednesday’s decision, saying he preferred to leave rates unchanged.