The Federal Reserve announced an increase in its target interest rate Wednesday afternoon, continuing its careful efforts to withdraw its crisis-era stimulus measures, while also hinting at faster rate hikes over the next two years.
The central bank raised its target for short term interest rates by a quarter percentage point to between 1.5 percent and 1.75, the sixth such hike of the recovery.
“The economic outlook has strengthened in recent months,” members of the monetary policy committee said in a statement wrapping up their two-day meeting, the first of Chairman Jerome Powell’s tenure.
Officials at the central bank also have been weighing whether to accelerate their campaign to “normalize” monetary policy in response to the Trump administration’s tax cuts and spending increases and an improving global economy.
Before Wednesday’s announcement, investors expect three or four more rate hikes this year.
In projections released alongside the announcement, Fed members guessed that there would be three rate hikes, including Wednesday’s. They also penciled in a faster pace of rate hikes in 2019.
This month, Fed Governor Lael Brainard suggested that some of the “headwinds” restraining economic growth over the past few years have become “tailwinds.” She cited the tax cuts and spending increases under President Trump, as well as other developments that aid the economy, such as the sinking dollar that has boosted manufacturing.
To some central bankers, the combination of low unemployment and better economic projections means that they have to raise rates. Delaying rate hikes could risk the economy “overheating” from too-high inflation or financial bubbles, even though inflation remains below the Fed’s 2 percent target.
The unemployment rate may not be able to go too much lower than it already is, according to Fed officials. Powell
testified last month that he thought that, at 4.1 percent, unemployment may already be lower than is sustainable, meaning that eventually unemployment will settle higher if the Fed is to keep inflation stable — thus meeting the Fed’s definition of “full employment.” He also allowed that, alternatively, the jobless rate could go as low as 3.5 percent.
In Wednesday’s projections, officials projected that unemployment will fall to around 3.6 percent over the next few years, but eventually settle at 4.5 percent.
They also allowed for the possibility of inflation rising slightly above the 2 percent target as the recovery ages on. Fed leaders, including Ben Bernanke and Janet Yellen, have said that 2 percent is a target rather than a ceiling, but inflation has run short of the target for almost all of the past five years.
The Trump administration has espoused a different view. Trump’s economic aides say that they want to not only lower unemployment, but also draw more people into the labor force.
Recent jobs reports offer some evidence that the economy could indeed create many more jobs without suffering higher inflation. Job gains have been running at about twice the rate needed to keep up with population growth, with only modest wage increases. The opposite would be expected if the economy really were near full employment.
No members of the monetary policy committee dissented from the decision.
