Federal Reserve signals its intent to gradually increase interest rates

WASHINGTON - The Federal Reserve said Friday that it expects the U.S. economy will strengthen and warrant further gradual interest rate increases.

That rate forecast was included in the Fed’s semi-annual monetary report to Congress, which Chair Janet Yellen will deliver to Congress next week. The Fed has raised interest rates three times since December, pushing its benchmark rate to a range of 1 percent to 1.25 percent. The Fed noted that policymakers still expect one more rate hike this year and three hikes in 2018.

The Fed said this projected pace of hikes would still allow the labor market to keep strengthening and inflation to climb to the Fed’s 2 percent target. The Fed also signaled it expects to begin reducing its massive bond holdings this year.

The Fed’s Monetary Policy Report, presented twice a year, cited a number of reasons to be optimistic about the economy.

The report said that while consumer spending, which accounts for 70 percent of economic activity, was sluggish at the start of 2017, it “appears to have rebounded recently supported by job gains, rising household wealth and favorable consumer sentiment.”

Likewise, business investment has accelerated, the Fed said, after being weak for much of 2016, helped by a surge in spending on drilling and mining activity.

The government reported Friday that employers added a bigger-than-expected 222,000 jobs in June, the most in four months.

Analysts predicted the size of the June gain would keep the Fed on track to raise rates again. Many say the next rate hike will likely occur in September, after which the Fed will begin trimming its bond holdings.

The Fed’s $4.5 trillion balance sheet is five times the size of the holdings it had in the summer of 2008 before the worst financial crisis in seven decades. That pushed the country into a deep recession and forced the central bank to cut its federal funds rate to a record low near zero and use an array of policy tools to jumpstart economic growth. The bonds were purchased in an effort to keep long-term interest rates low.

The monetary report is normally released on the first day of Yellen’s congressional testimony that accompanies the report. The Fed said it was releasing the report early to give lawmakers more time to study the contents before Yellen’s testimony.