WASHINGTON — The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday and signaled it will raise rates two more times this year, a shift driven by officials’ increasingly rosy assessment of the economy.
A statement released at the end of the Fed’s two-day meeting took several steps to show officials no longer view the United States economy as needing a boost and are instead beginning to worry more about the threat of inflation.
“The economy is doing very well. Most people who want to find jobs are finding them,” Fed Chairman Jerome H. Powell said on Wednesday at a news conference. “Ongoing job gains are boosting wages and confidence.”
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 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 comprise 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 Great 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.”
Mr. Powell said the language was removed from its forward-looking guidance since the Fed expects interest rates to “move well within” the range of normal levels.
Inflation fears are rising – a bit
The latest reading of the Consumer Price Index, released on Tuesday, showed headline inflation and so-called core inflation, which strips out volatile food and energy prices, continuing to rise. The Fed prefers a different inflation measure, the personal consumption expenditures index, but analysts expect it to increase similarly.
The economic projections released on Wednesday, which represent the median forecast of F.O.M.C. officials, echo those expectations. Officials raised their projections of both headline and core inflation.
A few Fed officials have raised concerns that the inflation trend could accelerate rapidly, forcing the Fed to raise rates faster than expected to keep the economy from overheating. They appeared to have won a convert in Wednesday’s projections, which now show a majority of officials expect rates to rise to a range of 2.25 to 2.5 percent by the end of this year. Officials continue to project three additional hikes in 2019, but reduced the number of forecast hikes for 2020 from two to one.
But the statement continues to suggest Fed officials will allow inflation to run slightly above 2 percent for some time, by underscoring, multiple times, that the Fed’s target rate is “symmetric”.
Trade fears aren’t holding back growth forecasts
Both the minutes of the last Fed meeting, in April, and the anecdotes in the latest version of the Beige Book, which surveys business contacts at each of the 12 regional Fed banks, were loaded with worries about the Trump administration’s trade agenda and its potential to hurt economic growth. That was particularly true in the manufacturing sector, where businesses expressed concerns over the consequences of the administration’s tariffs on imported steel and aluminum, which recently went into effect.
Mr. Powell has acknowledged those concerns and criticized tariffs in general, but, under his leadership, the Fed has taken a wait-and-see approach to possible downsides from White House trade policy. Economists generally warn that tariffs slow economic activity while driving up prices in the economy, which would set off inflation. But the Fed’s statement on Wednesday appeared to shrug off those concerns — though the statement continued to caution, as it has previously, that Fed officials would continue to monitor “readings on financial and international developments” in determining future rate increases.
Officials aren’t waiting to see wage growth
The rise in consumer prices over the last year has effectively wiped out any wage increases for nonsupervisory workers, the latest Consumer Price Index data suggest. That is odd for an economy with a tight labor market, with unemployment running at a 3.8 percent. And some analysts say it’s a reason for officials to slow their pace of rate increases, since the benefits of a hot economy have not yet translated into a significant wage boost for workers.
At a comparable time of low unemployment, in 2000, “wages were growing at near 4 percent year-over-year and the Fed’s preferred measure of inflation was 2.5 percent,” both above today’s levels, Tara Sinclair, a senior fellow at the Indeed Hiring Lab, said in a research note. “The Fed continues to promise to move slowly and to carefully watch all incoming data. Too many increases too quickly could choke the economy before we really see how good it could get.”
There was no sign in Wednesday’s releases that most Fed officials share that concern, despite seeing even lower unemployment in 2018 than previously anticipated.
There be more news conferences
Mr. Powell announced that he will now hold a news conference after every monthly Fed meeting, instead of just on a quarterly basis. Mr. Powell said the change “does not signal anything” about rate increases and said it is “only about improving communications.”
inaugural news conference as chairman. “My colleagues and I are committed to communicating as clearly as possible about what we’re doing and why we’re doing it,” he said. Some analysts believe he could announce such a move on Wednesday.
Right now, markets only anticipate rate increases to occur at the meetings that are followed by a question-and-answer session. Shifting to a news conference after every meeting would give officials more flexibility on when to raise rates, a factor that Mr. Powell alluded to in March, when he said “I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy.”
They added, “While the initial market reaction could be more hawkish, we would perceive such a move as relatively neutral, as it would just allow more flexibility in terms of the timing of rate hikes.”