(Bloomberg) — The Federal Reserve raised its benchmark lending rate a quarter point and continued to project two more increases this year, signaling more vigilance as inflation approaches its target.
“In view of realized and expected labor market conditions and inflation, the committee decided to raise the target range for the federal funds rate,” the Federal Open Market Committee said in its statement Wednesday. “Near-term risks to the economic outlook appear roughly balanced.”
Investors had almost fully expected the increase to a range of 0.75 percent to 1 percent following unusually clear signals from policy makers including Chair Janet Yellen, who explained the committee’s thinking at a press conference in Washington.
“Our decision to make another gradual reduction in the amount of policy accommodation reflects the economy’s continued progress,” she told reporters. “Today’s decision is in line with that view, and does not represent a reassessment.”
Yields on two-year U.S. Treasuries declined about 6 basis points to 1.31 percent at 2:51 p.m. in New York and 10-year yields fell 9 basis points to 2.51 percent. The S&P 500 Index of U.S. stocks was up 0.6 percent at 2,379.56.
“I’m a little bit surprised” Fed officials continued to forecast a total of three rate increases this year, said Daniel North, chief economist at credit insurer Euler Hermes, in Owings Mills, Maryland. “Inflation is rising, so I’ve been thinking they would project four hikes to keep the financial markets prepared” for a more rapid pace of rate moves.
The U.S. economy has mostly met the central bank’s goals of full employment and stable prices, and may get further support if President Donald Trump delivers promised fiscal stimulus.
For now, officials stuck with their “gradual” approach to tightening monetary policy, while removing the word “only” when a previous statement called the approach “only gradual.” Central bankers left unchanged their median projections for three quarter percentage-point increases in 2018, while the median fed funds rate estimate for 2019 rose to 3 percent from 2.9 percent.
They also repeated a commitment to maintain their balance-sheet reinvestment policy until rate increases were well under way. Yellen said officials had discussed the process of reducing the balance sheet gradually, but had made no decisions and would continue to debate the topic.
The FOMC made several changes to their language on inflation.
“The committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal,” the Fed said in the statement. “The committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.”
The committee described job gains as “solid” and said business investment “appears to have firmed somewhat.” Inflation, the statement said, is “moving close” to the committee’s 2 percent target.