Set to lift rate, Fed adopts investors’ optimism

The Federal Reserve is poised to raise its benchmark interest rate in mid-March, significantly sooner than investors had expected, as it moves to keep pace with a wave of economic optimism that started with the election of President Donald Trump.

In an unusually clear statement about a pending decision, Fed Chairwoman Janet L. Yellen said Friday in Chicago that the central bank was likely to act at its next policymaking meeting — barring any unpleasant economic surprises.

Ms. Yellen added that the Fed still expected to raise rates twice more later in the year, which she said would bring the benchmark rate close to a level that the Fed

regards as neutral, with low rates no longer providing an inducement for borrowing and risk-taking. That outlook signals that an end is finally in sight for the Fed’s economic stimulus campaign, devised during the depths of the financial crisis more than eight years ago.

Stanley Fischer, the Fed’s vice chairman, delivered the same message at the same time at a conference in New York. “We’ve seen a lot of substantial change in a relatively short time,” Mr. Fischer said of the postelection shift in economic conditions. “There is almost no economic indicator that has come in badly in the last three months.”

Asked whether Fed officials were delivering a coordinated message, Mr. Fischer responded wryly, “If there has been a conscious effort, I’m about to join it.”

The impending rate increase could heighten tensions with the White House, which wants to stimulate growth by cutting taxes, reducing regulation and increasing defense and infrastructure spending. Fed officials have concluded the economy is growing at something close to the maximum sustainable pace, meaning faster growth should be offset by faster rate increases.

Financial markets, however, are taking the prospect of higher rates in stride. The Standard & Poor’s 500 index, which is up more than 11 percent since Election Day, ended trading Friday mostly flat.

The prospective Fed move has modest short-term implications for consumers. Interest rates on car loans and some kinds of credit card debt will tick upward, but remain at low levels by historical standards. Rates on 30year mortgages are up by about half a percentage point over the past year.

The broader consequences depend on the Fed’s ability to raise interest rates without slowing economic growth. The Fed’s goal is to return rates to a level that neither encourages nor impedes economic activity. Over the past century, however, most of the central bank’s attempts to strike that balance have ended in economic recessions.

The U.S. economy is in the midst of one of the longest expansions in the nation’s history, but it is also one of the weakest. The economy expanded by 1.6 percent in 2016 compared with 2.6 percent in 2015, according to the government’s most recent estimate.

Fed officials have concluded, however, that monetary policy cannot deliver faster growth. The Fed’s job is to minimize unemployment and moderate inflation. The unemployment rate, at 4.8 percent in January, is in a range Fed officials regard as healthy, and prices rose 1.9 percent in the 12 months ending in January, the closest the Fed has come since 2012 to hitting its target of 2 percent annual inflation.

In December, the Fed raised its benchmark rate for just the second time since the financial crisis, to a range of 0.5 to 0.75 percent, and predicted three increases in 2017.

At the beginning of the week, however, Wall Street analysts and investors did not expect the Fed to raise rates again any earlier than June. The Fed issued a measured statement after its policy meeting in early February, and the meeting minutes, published three weeks later, conveyed little sense of urgency.

Now, after a week of discussions, analysts regard a March increase as highly likely.

Michael Feroli, chief U.S. economist at JPMorgan Chase, described the shift in Fed language as “remarkably swift and decisive.” Investors put the chances at almost 80 percent in trading Friday, according to an analysis of asset prices by CME Group.

Some Fed officials appear particularly focused on the rise of the stock market. William C. Dudley, president of the Federal Reserve Bank of New York, who described markets as “very buoyant” on Tuesday, has said in the past that if markets did not respond to rate increases, the Fed might need to act more forcefully to tighten financial conditions.

The U.S. economy is in the midst of one of the longest expansions in the nation’s history, but it is also one of the weakest.