Fed expects economic gains to prompt gradual rate hikes

The Federal Reserve says it expects that the ongoing strength of the U.S. economy will warrant gradual increases in interest rates this year, delivering the same steady-as-it-goes message under new leader Jerome Powell as it had provided under Janet Yellen.

The Fed’s projection on rate hikes came with the release Friday of its semi-annual monetary report to Congress. Powell will testify on the report before the House Financial Services Committee next Tuesday, making his first public appearance since taking over as chairman earlier this month.

The report stated that the Fed expects steady economic gains will warrant “further gradual increases” in the Fed’s benchmark rate. But it said the rate was likely to remain low enough to stimulate the economy over the next two years.

Sal Guatieri, senior economist at BMO Capital Markets, said the monetary report was “in line with further gradual rate hikes” although he said various sections could be read to support either an expected three hikes or possibly four hikes this year.

He said that comments in the report that noted that the labour market was “near or a little beyond” full employment could be a signal that the Fed will boost rates four times this year while other comments that wage growth remains “moderate” could be cited to support the view that the Fed was sticking with its December projection for three rate hikes.

Chris Rupkey, chief financial economist at MUFG Union Bank in New York, said he believed the overall tone in the report was a signal the central bank under Powell is prepared to accelerate rate hikes to four this year.

“The Fed is inching closer to our call for them to raise interest rates four times this year as the worry over low inflation has been moved to the back burner,” Rupkey said.