Federal Reserve officials voted Wednesday to raise the central bank’s interest rate target by a quarter percentage point, the second rate increase since December, but stopped short of indicating that the outlook for the economy under the new Trump administration is strong enough to speed up their plans for tightening monetary policy even faster.
At a range of 0.75 percent to 1 percent, the Fed’s target for short-term rates is now effectively back to where it was as the financial crisis accelerated in October 2008.
While investors expected the move, the larger question surrounding Wednesday’s Fed decision was whether Chairwoman Janet Yellen and her colleagues would signal that future rate hikes will be more frequent in response to the recent economic good news.
On that score, the Fed committee indicated Wednesday that they still planned on two more quarter-point rate hikes in 2017 after this week’s, and for a marginally faster pace of hikes in the years ahead.
They also slightly boosted their economic forecast, seeing faster economic output growth of a tenth of a percentage point in 2018. Otherwise, however, they didn’t much change their description of the economy or the outlook.
One member of the committee, Federal Reserve Bank of Minneapolis president Neel Kashkari, dissented from the decision to raise rates, preferring to keep the target lower.
In the lead-up to Wednesday’s meeting, inflation has risen to near the Fed’s 2 percent target. The unemployment rate, at 4.7 percent, is below where Fed members previously thought it could go sustainably without pushing inflation too high, and job creation has been strong in recent reports.
Meanwhile, President Trump’s election has sent business and consumer expectations soaring, a reaction that is at least partly a reflection of expectations that the unified Republican government will implement tax reform, cut back regulations and possibly increase infrastructure investment.
The question that Fed members debated Tuesday and Wednesday was just how quickly they need to readjust policy to take into account the brighter economic outlook.
Before Wednesday’s meeting, it appeared that the Fed’s thinking may have run ahead of markets’ expectations. This month, Yellen and other officials surprised investors by hinting at a significantly stepped-up pace of rate hikes. Even the Fed’s biggest “doves,” who have cautioned against tightening monetary policy given that inflation has drifted below target since 2012, have indicated that they are on board with bringing rates back to more normal levels.
In Wednesday’s statement, the Fed acknowledged that inflation is now close to target. It also said that it would carefully watch whether inflation approaches its “symmetric” 2 percent target. That one adjective could be a hint that members of the central bank are willing to let inflation rise above 2 percent temporarily to compensate for the years that they have allowed it to run below.
