Fed raises interest rates and foresees 3.6 percent unemployment
WASHINGTON — The Federal Reserve raised interest rates by a quarter of a percentage point Wednesday and signaled it will raise rates two more times this year, as Fed chairman Jerome Powell proclaimed the US economy to be in “great shape” and that “most people who want to find jobs are finding them.”
Powell, speaking at a news conference after the Fed’s two-day meeting, said the economy has strengthened significantly since the financial crisis and is approaching a “normal” level where monetary policy may no longer be needed to either encourage or discourage economic activity. The Fed now projects unemployment to fall to 3.6 percent in 2018 and indicated it will raise interest rates a total of four times this year.
That is a far different stance than just a decade ago, when the Fed cut interest rates to near zero in the wake of the financial crisis as it sought to stimulate an economy that had slipped into a recession.
“The economy is doing very well
,” Powell said. “Ongoing job gains are boosting wages and confidence.”
A statement released at the end of the Fed’s two-day meeting took several steps to show that officials no longer view the US economy as needing a boost and are instead beginning to worry more about the threat of inflation.
Officials noted that economic activity has been rising “at a solid rate,” a change from their May statement, when they called the rate “moderate.”
Quarterly economic projections released at the meeting showed that Fed officials expect the economy to grow at a 2.8 percent rate this year, up from a 2.7 percent forecast in March. Officials also now predict the unemployment rate to dip to 3.6 percent by year’s end, down from a forecast of 3.8 percent in March.
That continued strengthening prompted the Fed to signal an additional rate increase for 2018, for a total of four expected rate hikes in 2018, up from the previous projection of three. The expectation of an additional rate hike is the result of a single vote shifting toward more increases among the officials who make up the Federal Open Market Committee.
Officials raised their headline inflation rate forecast for the year as well, to 2.1 percent from 1.9 percent. The Fed now predicts inflation will run slightly above its target rate of 2 percent through 2020, at 2.1 percent each year, a slight overshoot that Fed officials have roundly indicated they are comfortable with.
Wednesday’s rate increase was the second this year and the seventh since the end of the recession.
It was widely expected and brought the Fed’s benchmark rate to a range of 1.75 to 2 percent.
The last time the rate topped 2 percent was in late summer 2008, when the economy was contracting and the Fed was cutting rates toward zero, where they would remain for years after the financial crisis. The increases this year are part of a gradual series of steps to return rates to historically normal levels, and they reflect both the Fed’s confidence in America’s economic strength and its commitment to bring the inflation rate to its target of 2 percent.
Fed officials on Wednesday removed a line stating that “market-based measures of inflation compensation remain low” and several sentences that expressed caution over the Fed’s future rate moves, including that “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
Powell said the language was removed from the Fed’s forward-looking guidance since the committee expects interest rates to “move well within” the range of normal levels since it expects the economy to strengthen.
As for when the Fed might stop its tightening, Powell said it was continuing to discuss the metrics it will look at to determine when it has reached a “neutral rate” — meaning monetary policy is neither encouraging or discouraging economic activity.
“We know we’re getting closer to that neutral level,” he said, adding the committee is “very actively considering” the question of when to stop increasing rates.
Financial markets had been expecting the Fed to raise the benchmark rate and reaction among investors was muted, even as the monetary policy statement struck some as signaling growing confidence that rate hikes would continue and might even proceed at a faster pace.