Look out for higher credit card bills

Fed raises interest rates for third time this year

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 hikes 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%. 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 hike 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, adjustable-rate mortgages and homeequity 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% but sharply raised it for 2018 — to 2.5% from its 2.1% estimate in September, in an apparent nod to the Republican tax-cut stimulus.

Policymakers also increased their growth estimate to 2.1% in 2019 and 2% in 2020, up from 2% and 1.8% respectively. They now expect the 4.1% unemployment rate to fall to 3.9% by the end of next year, below their prior 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.

She added: “At the moment, the U.S. economy is performing well. The growth that we’re seeing is not on the back of ... an unsustainable run-up 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 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 policymakers’ median estimate. The Fed also left unchanged its estimate that the rate will be 2.7% at the end of 2019 and 2.8% over the longer run. However, it bumped up its estimate of the rate at the end of 2020 to 3.1% from 2.9%.

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

In a post-meeting statement, the Fed noted that inflation has been running below its 2% target.

But it reiterated that it expects it to drift toward that level “over the medium term.”

Fed Chair Janet Yellen