In stark contrast to the economic exuberance of President-elect Donald Trump — whose pledge to double the pace of economic growth has sent the stock market soaring — the Federal Reserve on Wednesday offered a more measured long-range outlook.
In raising a key interest rate for only the second time since the 2008 financial crisis, the Federal Open Market Committee, the Fed’s rate-setting group, said its previous projections for unemployment, inflation, and economic expansion were largely unchanged from before the Nov. 8 election.
The Fed now expects the economy to expand by 2.1 percent in 2017, compared to a previous 2.0 percent projection. And in the longer term, it still pegs economic growth at a fairly anemic 1.8 percent, far below Trump’s pledge of 4 percent.
Unemployment is expected to decrease to 4.5 percent in 2017, down slightly from the Fed’s previous forecast of 4.6 percent. And the core inflation projection remains the same in the coming years.
“The shifts you see here are really very tiny,” Fed chair Janet Yellen said.
Pointing to a strengthening labor market and a more resilient economy, the Fed voted unanimously to increase the interest rate by a quarter of a point to between 0.5 and 0.75 percent.
And it said it anticipated that it will raise rates three times next year, instead of twice, as projected before the election — a sign of growing optimism in the US economy.
A higher federal funds target rate can push up the cost of borrowing for consumers on mortgages, credit cards, and auto loans.
Wednesday’s rate increase was a “reflection of the confidence we had on the progress that the economy has made,” Yellen said during a news conference after the central bank’s two-day meeting, its first after the election and the last in 2016.
Unemployment dropped to 4.6 percent in November, despite shocks throughout the year, including the collapse in oil prices (in part due to slower global economic growth) and the unexpected vote by Britain to exit the European Union.
Inflation is also on target to meet the central bank’s goal of 2 percent — considered healthy — in the coming years, Yellen said.
But she cautioned that business investment has continued to be sluggish and that worker productivity, which is key to improving the standard of living, remains low.
After the Fed released its statement and economic expectations, the Dow Jones industrial average fell 119 points, or 0.6 percent, to 19,792.53. The Standard & Poor’s 500 index lost 0.81 percent, the yield on the 10-year Treasury note climbed to 2.57 percent from 2.47 percent on Tuesday, and the dollar rose more than 1 percent against a basket of foreign currencies.
Investors are trying to parse the diverging messages from the Fed and the incoming Trump administration, said Lindsey M. Piegza, chief economist at Stifel Nicolaus & Co, a Missouri financial services firm.
The Fed’s message is “one change in the administration is not going to flip the switch on the US economy,” Piegza said. “It was a shot over the bow to the Trump administration, that it’s not buying into the market.”
Investors have been bullish because Trump has promised to revise tax policy, ease regulation, and spend more on infrastructure. He has also nominated several businessmen and familiar Wall Street names to key positions in the administration and will have a Republican-controlled Congress to help him push through legislation.
But it’s unclear how much stimulus spending Trump will propose and how much Congress is willing to support, Piegza said.
Any additional spending is likely to require tax increases or budget reductions elsewhere, which could put the brakes on growth, she said.
The high level of uncertainty about Trump’s boisterous campaign promises and what he can actually deliver has complicated the Fed’s efforts to draw up an economic game plan.
Yellen said some committee members took the election and Trump’s policy proposals into consideration in their projections, but said there is “considerable uncertainty.”
Yellen was also skeptical about whether the economy needs a large, deficit-financed injection of fiscal stimulus, with the labor market so close to full employment. Yellen said she wasn’t trying to advise the administration and that there may be other reasons for a fiscal boost, including spurring businesses to invest more and to jump-start lackluster productivity.
Yellen said the Fed has been working with members of Trump’s transition team.
Trump’s election and his policy proposals have increased the chances the Fed will have to raise rates more often than it has projected, said Nariman Behravesh, chief economist at IHS Inc., a forecasting firm in Lexington.
The tax cuts and increased federal spending that Trump has proposed are likely to increase prices and force the central bank to raise rates in an effort to keep inflation in check.
IHS is forecasting three rate increases next year, but may increase that after Trump takes office, he said.
During Wednesday’s press conference, Yellen reasserted the need for an independent Federal Reserve and reiterated her intention to remain chair through the end of her term in February 2018. Trump has been critical of Yellen’s leadership on monetary policy and will be able to nominate a new chair after her term ends.
Yellen also defended the stricter regulations adopted after the financial crisis, which, she said, have decreased the odds of key financial institutions failing. The regulations are at risk of repeal under the Trump administration.