Fed raises interest rates and makes few changes to outlook ahead of transition to Powell

Posted by jbrumley on December 13, 2017 3:00 PM

- Central bank sticks with forecast of three rate hikes in 2018 -

By Greg Robb and Jeffry Bartash, MarketWatch

The Federal Reserve on Wednesday lifted a key U.S. interest rate and struck a wait-and-see stance that takes into account weak inflation and a change in leadership at the central bank.

The central bank as expected on Wednesday raised its benchmark federal-funds rate by a quarter percentage point to between 1.25% and 1.5% — the fourth increase in a year.

Senior officials stuck to their earlier projections of three rate hikes in 2018.

Stocks extended their gains after the Fed’s decision.

The aim is to gradually raise the cost of borrowing for consumers and businesses to ensure the economy doesn't overheat and spark a bout of inflation.

Price pressures have been muted this year.

Economists said the Fed is lifting rates even though inflation is low out of a concern about persistently easy financial conditions that they worry could lead to a bubble. Stocks keep hitting record highs, for instance, and interest rates remain quite low despite the five Fed rate hikes since late 2015.

The majority of officials think inflation will move up in 2018 given that unemployment is so low. The Fed expects the unemployment rate will dip below 4% next year.

Two senior officials, Minneapolis Fed President Neel Kashkari and Chicago Fed President Charles Evans, preferred to leave rates unchanged in light of low inflation readings. The vote to raise rates was 7 to 2.

Fed governor Jerome Powell will take over the helm of the central bank from Chairwoman Janet Yellen in early February. Powell is expected to continue Yellen's gradual rate moves.

In a statement released after the meeting, the Fed was upbeat about the recent performance of the economy, saying the labor market has “continued to strengthen and that economic activity has been rising at a solid rate.”

The Fed did raise its estimate for GDP growth in 2018 to 2.5% from 2.1%, perhaps taking into account the Republican tax plan expected to be passed soon.

While inflation has been below the Fed’s 2% target, the central bank said price pressures would stabilize around its 2% goal over the next year or two.

Many economists said there needs to be more evidence of price pressures for the Fed to continue gradually raising rates in 2018.

There are some doubts on the Fed that rates can keep going up. Six of the 16 Fed officials don’t think the central bank will be able to raise rates three times next year, according to the Fed’s so-called dot plot. Four see more than three rate hikes.

From MarketWatch