WASHINGTON – The Federal Reserve raised interest rates on Wednesday afternoon for the first time in a year, and it signaled that rates could continue to rise next year more quickly than officials had previously expected.
The increase was unanimous and modest, raising the Fed’s key interest rate by a quarter point, from a range of 0.25 to 0.5 percent to a range of 0.5 to 0.75 percent. It reflects Fed officials’ confidence in the strengthen of the U.S. economy and what officials see as budding signs of higher inflation.
The decision came “In view of realized and expected labor market conditions and inflation,” members of the Federal Open Market Committee said in a statement. At two instances in the statement, committee members hinted that inflation is picking up, though still below the central bank’s target rate.
Economic projections also released by the Fed indicate that Federal Reserve Board members and regional bank presidents have brightened their forecasts for 2016 and 2017 economic growth slightly, compared to their last projections in September. The group now expects the economy to grow 1.9 percent in 2016 and 2.1 percent in 2017.
The projections also show that the group expects the Fed to increase rates three times in 2017, to a rate of 1.4 percent by year’s end. The September projections signaled only two expected hikes next year.
Despite those changes, the statement gave no indication that officials are bracing for bursts of increased growth or inflation stimulated by the tax cuts and spending measures that President-elect Donald Trump has promised to enact once he takes office. Analysts have warned that if Trump and Congress agree to slash tax rates and increase spending, in areas such as infrastructure, the Fed could be forced to raise rates faster than expected in order to counter rising prices in the economy.
Much of the official statement was unchanged from November, when the Fed declined to raise rates in order “to wait for some further evidence of continued progress” toward maximum employment in the economy and a target inflation rate of 2 percent. Officials said Wednesday, as they said a month ago, that “near-term risks to the economic outlook appear roughly balanced” – meaning growth is as likely to speed up as it is to slow down.
Fed officials now judge the overall inflation rate to be 1.5 percent, up from 1.3 percent in September, but still well below target. They judge core inflation, which excludes volatile commodities such as gasoline prices, to be 1.7 percent.
In the statement, officials said “inflation has increased since earlier this year,” a change from November, when the statement said “inflation has increased somewhat since earlier this year.” Officials also said measures of inflation compensation “have moved up considerably but remain low”; last month, the word “considerably” did not appear in that line.
The November and September meeting statements both pointed toward a likely December rate hike. Economic forecasters and financial traders have largely based their outlooks for monetary policy next year on the assumption that the central bank would follow through.
The central bank last raised rates at its December meeting a year ago, its first step to move the Fed from what economists call the zero-lower bound – meaning interest rates hovering around zero percent.
The questions facing Fed Chair Janet L. Yellen at her news conference Wednesday afternoon, following the conclusion of the two-day meeting of the open market committee, will likely focus on the outlook for future hikes and the Fed’s expectations for economic performance under the new administration.
Trump has promised to cut taxes for individuals and corporations and to boost infrastructure spending by as much as $1 trillion through tax credits his team says will pay for themselves.
Analysts did not expect Fed officials to change their forecasts of future increases this month based on an expectation of what Trump – who criticized Yellen on the campaign trail – and Congress might do.
“We very much doubt that FOMC members want to be accused of seeking to influence Congress and the new administration,” analysts at Pantheon Macroeconomics wrote this week, “given how unpopular the Fed is already with Republican politicians.”