WASHINGTON (CBS/AP) – The Federal Reserve is raising its benchmark interest rate and signaling that it is sticking with a gradual approach to rate hikes under its new chairman, Jerome Powell.
The Fed is boosting its key short-term rate by a modest quarter-point to a still-low range of 1.5 percent to 1.75 percent and will keep shrinking its bond portfolio. Both steps show confidence that the U.S. 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 expects to raise rates twice more this year.
The Federal Open Market Committee, the Fed’s rate-setting panel, said in a statement released at the end of its latest two-day policy meeting that the U.S. economy has strengthened in recent months and that it expects the job market to remain strong.
The Fed forecasts that unemployment this year will fall to 3.8 percent, down from a current rate of 4.1 percent. That would be the lowest jobless rate since April of 2000, when the economy was still enjoying the fruits of the internet boom. Unemployment is projected to fall even further in 2019, to 3.6 percent, which would be the lowest rate since 1969.
“The Fed seems to be gaining confidence in the normalisation process as they see the labor market tightening quite a bit further than they previously predicted,” Brian Coulton, chief economist with credit-rating agency Fitch, said in a note.
Fed officials expect inflation to rise steadily over the next 12 months, but not to surge as many investors have feared. The FOMC forecasts that inflation will settle around its 2 percent target by year-end and into 2019.
Stocks fell into “correction” territory earlier this year over Wall Street’s concerns that the central bank might have to raise interest rates faster than expected to keep a lid on inflation.
That remains a possibility. Compared with the Fed’s last readout on the economy in December, more policymakers now think they may have to increase the pace of rate hikes this year, with several officials forecasting four increases.
“More fed funds rate increases are coming in 2018, but the FOMC is split right now between two and three additional rate hikes,” said Gus Faucher, chief economist with PNC Financial Services Group, in a note. “It depends on what happens to the economy through the rest of the year.”
The Fed’s rate hike marks its sixth since it began tightening credit in December 2015. It is sticking with the forecast it issued in December for three increases in 2018. But it did boost its 2019 estimate from two hikes to three.
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