WASHINGTON — The Federal Reserve is raising its benchmark interest rate to reflect a solid U.S. economy and signaling that it’s sticking with a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell.
The Fed said it expects to increase rates twice more this year. At the same time, it increased its estimate for rate hikes in 2019 from two to three, reflecting an expectation of faster growth and lower unemployment.
The central bank boosted its key short-term rate Wednesday by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent and said it will keep shrinking its bond portfolio. Both steps show confidence that the economy remains sturdy nearly nine years after the Great Recession ended. The actions mean consumers and businesses will face higher loan rates over time.
The Fed’s rate hike marks its sixth since it began tightening credit in December 2015. The action was approved 8-0, avoiding any dissents at the first meeting that Powell has presided over as chairman since succeeding Janet Yellen last month.
Bond yields rose and stocks held on to much of their gains after the Fed’s announcement, which was widely expected. The yield on the 10-year Treasury note, a benchmark for mortgages and other loans, rose from 2.87 percent to 2.93 percent. The Dow Jones industrial average was up 140 points, or 0.6 percent; it had been up 210 just before the announcement.
Some investors had speculated that Powell might move to impose his mark on the central bank by indicating a faster pace of rate hikes for 2018. But the new economic forecast, which includes a median projection for the path of future rate hikes, made no change to the December projection for three hikes this year.
If the Fed does stick with its new forecast for three rate increases this year and three in 2019, its key policy rate would stand at 3.4 percent after five years of credit tightening. Wednesday’s forecast put the Fed long-term rate — the point at which its policies are neither boosting the economy nor holding it back — at 2.9 percent.
Wednesday’s statement showed only minor changes from the text the Fed had issued in January after Yellen’s final meeting. The statement described economic activity as rising at a “moderate rate,” a slight downgrade from January, when the Fed described the economy as rising at a “solid rate.”
Since the start of the year, economists have been downgrading their estimates for growth in the January-March quarter growth to reflect a slowdown in consumer spending, which most analysts think will prove temporary.
The Fed’s statement did not mention the extra government stimulus that has been added since their last economic forecast in the form of a $1.5 trillion tax cut and a budget agreement that will add $300 billion in government spending over the next two years.
But the Fed’s new forecast does envision marked increases in economic growth: It raises the estimate to 2.7 percent growth this year, up from 2.5 percent in the December projection, and 2.4 percent in 2019, up from 2.1 percent. Those increased expectations presumably reflect the expected impact of the extra government spending.
Unemployment, now at a 17-year low of 4.1 percent, is expected to keep falling to 3.8 percent at the end of this year and 3.6 percent at the end of 2019, which would be the lowest rate in a half-century. The Fed expects inflation, which has run below its 2 percent target for six years, to stay at 1.9 percent this year and then rise to 2 percent in 2019.
A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates.
The financial markets have been edgy for weeks, and Powell’s back-and-forth comments have been only one factor. A sharp rise in wage growth reported in the government’s January jobs report triggered fears that higher labor costs would lead to higher inflation and, ultimately, to higher interest rates. Stocks sank on the news. But subsequent reports on wages and inflation have been milder, and the markets appear to have stabilized.
The February jobs report pointed to an unusually robust labor market: Employers added 313,000 jobs, the largest monthly gain in 1½ years. The unemployment rate remained at a 17-year low of 4.1 percent.
Other measures of the economy, though, have been more sluggish. Consumer spending, the economy’s primary fuel, has slowed this year.