Fed likely to continue gradual rate increases

WASHINGTON – The Federal Reserve said Friday it expects low unemployment and rising inflation will keep it on track to raise interest rates at a gradual pace over the next two years. By late 2019, the Fed says its key policy rate should be at a level that will be slightly restrictive for growth.

The Fed’s projection on rate hikes came with release of the central bank’s semiannual monetary report to Congress. Fed Chairman Jerome Powell is scheduled to testify on the report for two days next week.

The Fed last month raised its policy rate for a second time this year and projected two more hikes in 2018. The monetary report says the expectation is that further hikes will leave the rate slightly above its neutral level by late next year.

The Fed’s current projection for the neutral rate – the point where monetary policy is not stimulating growth or restraining it – is 2.9 percent. With the June rate hike, the current range for the policy rate, known as the federal funds rate, is 1.75 percent to 2 percent.

Powell, who will testify next Tuesday before the Senate Banking Committee and on Wednesday to the House Financial Services Committee, said in an interview this week that he believed “the economy’s in a really good place” at the moment with unemployment at the lowest point in nearly two decades and inflation finally approaching the Fed’s optimal goal of 2 percent annual increases.

In the monetary policy report, the Fed said that it expects “a gradual approach to increasing the target range for the federal funds rate will be consistent with a sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2 percent objective over the medium term.”

The monetary report noted that worries about rising trade tensions had caused a period of turbulence in financial markets earlier this year.

In his interview with the radio program “Marketplace” on Thursday, Powell said that Fed officials have been hearing a “rising level of concern” from business executives about tariffs and a U.S.China trade war.