Federal Reserve officials announced an interest rate increase Wednesday, the second hike of the year, and signaled that they will accelerate the pace of future increases in response to what they described as a “solid” economic growth.
The decision brings the central bank’s target for short-term interest rates to between 1.75 percent and 2 percent, where it was in late spring of 2008 as the financial crisis unfolded.
Officials also projected that they would raise the rate target twice more this year, rather than just once as previously expected.
That projection answered the bigger question that faced investors prior to Wednesday’s two-day meeting: Whether Chairman Jerome Powell and company would decide to accelerate the pace of future increases in response to the encouraging economic news of the past few months.
More specifically, market-watchers wondered whether the Fed would plan to raise rates just once more in 2018, for a total of three on the year, or twice, for a total of four.
The Fed has long said that it plans to gradually raise interest rates and reverse crisis-era stimulus provisions as the economy improves to prevent spending from ramping up too fast and driving up inflation.
That plan, set in place by former Chairwoman Janet Yellen and followed by Powell, has left room for speculation only about whether the pace of economic growth would shift the timing of the rate hikes one way or another.
Wednesday’s announcement suggests that the Powell Fed believes that the strength of the economy now justifies tighter money.
Recent economic indicators have weighed in favor of faster rate hikes and tighter monetary policy. The jobs market, for instance, appears to be strengthening, with unemployment falling to the lowest rate in decades and job creation strengthening in May.
And inflation has risen closer to the Fed’s 2 percent target this year, after running below it for most of the past six years.
Fed officials noted those improvements in their statement Wednesday. They also projected faster economic growth for this year, seeing a 2.8 percent growth rate for gross domestic product, up from 2.7 percent. The committee also now generally sees the unemployment rate falling to as low as 3.5 percent next year, down from 3.8 percent currently. As recently as December, most Fed members didn’t think unemployment would crack 3.9 percent.
In an acknowledgment of how far the recovery has come, officials removed a section from Wednesday’s statement that had been used in past months to provide “forward guidance” about rate decisions by saying that they would keep rates low until the economy picked up.
None of the eight voting members of the committee dissented.
