Fed raises key interest rate

Policy-makers voice confidence in economy, increase growth estimate

WASHINGTON – With a notable upgrade to its economic outlook for 2018, the Federal Reserve agreed to raise its key interest rate Wednesday and maintained its forecast for three increases next year despite sluggish inflation.

As widely expected, the Fed’s policymaking committee lifted its benchmark short-term rate by a quarter percentage point to a range of 1.25 to 1.5 percent. It marked the central bank’s third such rate increase this year and a vote of confidence in an economy that has perked up in recent months. Still, it was just the fifth increase since the recovery from the Great Recession began in 2009.

The move is expected to ripple across the economy, nudging up rates, most noticeably for credit cards, adjustablerate mortgages and home-equity lines of credit. The effect on fixed-rate mortgages is likely to be less pronounced.

The Fed marginally pushed up its economic growth forecast for 2017 to 2.5 percent, but sharply raised it for 2018 — to 2.5 percent from its 2.1 percent estimate in September, in an apparent nod to the Republican tax-cut stimulus.

Policy-makers also increased their growth estimate to 2.1 percent in 2019 and 2 percent in 2020, up from 2 percent and 1.8 percent respectively. They now expect the 4.1 percent unemployment rate to fall to 3.9 percent by the end of next year, below their previous forecast.

“We see changes in tax policy as supportive of a modestly stronger economic outlook,” Fed Chair Janet Yellen said at her final news conference. “At the moment, the U.S. economy is performing

well. The growth that we’re seeing is not on the back of ... an unsustainable runup in debt (as occurred during the housing bubble). There’s much less to lose sleep over than there has been in quite some time.”

The Fed is also shrinking the $4.5 trillion portfolio of assets it amassed after the financial crisis, an initiative that could push long-term rates slightly higher.

The Fed’s two-day meeting took place against a backdrop of imminent changes in its leadership. Yellen, a Democrat, is expected to step down in February when chairman nominee Jerome Powell takes the helm.

Powell, a Fed governor and moderate Republican, is likely to continue the cautious interest-rate policy advocated by Yellen. On Wednesday, the Fed left its forecast for the federal funds rate intact, projecting three quarter-point increases in 2018 and two in 2019, based on policy-makers’ median estimate. The Fed also left unchanged its estimate that the rate will be 2.7 percent at the end of 2019 and 2.8 percent over the longer run. However, it bumped up its estimate of the rate at the end of 2020 to 3.1 percent from 2.9 percent.

Fed officials maintained their forecast for core inflation, which excludes volatile food and energy items, at 1.5 percent this year, 1.9 percent in 2018 and 2 percent in 2019.

In a post-meeting statement, the Fed noted that inflation has been running below its 2 percent target. But it reiterated that it expects it to drift toward that level “over the medium term.”

Besides Powell’s ascendance to the chairman role in February, President Trump also must fill what will soon be four vacancies on the Fed’s seven-member board of governors.

The policy-making committee is made up of those governors as well as 17 regional Fed bank presidents.