The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, as anticipated, but left its rate outlook for the coming years unchanged even as policymakers projected a short-term acceleration in US economic growth.
The move, coming at the final policy meeting of 2017 and on the heels of a flurry of relatively bullish economic data, represented a victory for a central bank that has vowed to continue a gradual tightening of monetary policy.
Having raised its benchmark overnight lending rate three times this year, the Fed projected three more hikes in each of 2018 and 2019 before a long-run level of 2.8 per cent is reached. That is unchanged from the last round of forecasts in September.
“Economic activity has been rising at a solid rate ... job gains have been solid,” the Fed’s policysetting committee said in a statement announcing the federal funds rate had been lifted to a target range of 1.25 per cent to 1.5 per cent.
Officials acknowledged in their latest forecasts that the economy had gained steam in 2017 by raising their economic growth forecasts and lowering the expected unemployment rate for the coming years.
Unemployment
Gross domestic product is expected to grow 2.5 per cent in 2018, up from the 2.1 per cent forecast in September, while the unemployment rate is seen falling to 3.9 per cent next year, compared to 4.1 per cent in the last set of projections.
But inflation is projected to remain shy of the Fed’s 2 per cent goal for another year, with weakness on that front remaining enough of a concern that policymakers saw no reason to accelerate the expected pace of rate increases.
In her final press conference as Fed chairwoman, Janet Yellen said the tax reform package working its way through Congress – a signature policy of President Donald Trump – had played into stronger economic forecasts released today by Fed officials.
“While changes in tax policy will likely provide some lift to economic activity in coming years, the magnitude and timing of the macroeconomic effects of any tax package remain uncertain,” she said.
Ms Yellen also cautioned about the current market in cryptocurrencies, specifically bitcoin in which futures started trading in US markets this week. She called the digital currency bitcoin a “highly speculative asset” that “doesn’t constitute legal tender”.
Caution over Bitcoin
Bitcoin surged about 17 times in value this year, prompting caution from central bankers around the world.
“Bitcoin at this time plays a very small role in the payment system,” Ms Yellen said, appearing to downplay it’s ability to affect wider financial markets. She added that bitcoin is “not a stable store of value”.
Chicago Fed president Charles Evans and Minneapolis Fed president Neel Kashkari dissented in the Fed's policy statement on Wednesday.
The Fed also said that, as of January, it would raise the amount of treasury bonds and mortgage-backed securities that it would not reinvest on a monthly basis to $12 billion and $8 billion, respectively. That is consistent with its balance sheet reduction plan. – Reuters
