WASHINGTON: The US Federal Reserve on Wednesday raised the benchmark interest rate a quarter point, noting that inflation is moving closer to the central bank’s two percent target.
But in announcing the first move since President Donald Trump took office in January, the Fed gave no hint that rates might have to rise more quickly if the White House pushes through its pro-growth policies, including tax cuts and spending programs.
The Fed’s policy-setting Federal Open Market Committee (FOMC) voted to raise the key federal funds rate to a range of 0.75-1.0 percent. There was one dissenting voice.
Neel Kashkari, the newly installed president of the Minneapolis Federal Reserve Bank, voted against it, preferring to hold off on raising rates.
“Inflation has increased in recent quarters, moving close to the Committee’s 2 percent longer-run objective,” the FOMC statement said, while also noting that “the labor market continued to strengthen” amid solid job gains, and that “economic activity has continued to expand at a moderate pace.”
The FOMC once again said it expects those economic improvements to continue with only “gradual adjustments” in the policy interest rate, although Fed Chair Janet Yellen has cautioned that policies that boost the pace of economic growth could prompt the Fed to raise rates faster.
In its quarterly economic projections, the central bankers still see the federal funds rate rising to 1.4 percent by the end of the year, which would imply another two increases, unchanged from the previous forecast.
They see the benchmark rate rising to 2.1 percent next year, the same as in the December Summary of Economic Projections (SEP), which would mean another two rate hikes in 2018.
The rate hike was widely expected by economists, given recent signs of increased hiring and rising inflation, but attention ahead of the two-day FOMC meeting shifted to whether the central bank would feel pressure to increase rates more than anticipated this year.
Yellen is due to speak at a news conference to explain the decision, and Fed-watchers will scrutinize her comments carefully for any indication they are considering additional rate hikes.
The Fed last acted in December when it adopted only its second interest rate increase in a decade, but it has repeatedly cited the uncertainty surrounding economic outlook while details of Trump’s economic policy program remain scarce.
With unemployment already low and wages and inflation starting to creep up, some analysts worry that major government projects risk overheating the economy and sending prices soaring. That likely would cause the Fed to raise interest rates even faster—and possibly put Yellen at odds with Trump.
The rest of the SEP forecasts remained unchanged as well, with the Fed members expecting economic growth of 2.1 percent this year and next, with an unemployment rate of 4.5 percent.
Fed’s preferred inflation measure, the personal consumption expenditures index, is expected to hold at 1.9 percent this year, and 2.0 percent in 2018, which is the Fed’s target.
The FOMC also noted the improvement in business investment which “appears to have firmed somewhat,” an upgrade from the February 1 policy statement.
But policymakers continue to view risks to the economic outlook as “roughly balanced.” AFP