WASHINGTON – The Federal Reserve raised interest rates for the third time this year but continued to worry that inflation risks remain above target, in what appeared to be a signal that the central bank would keep pushing for further rate hikes.
The Fed raised its benchmark lending rate by a quarter of a percentage point, as expected, to a range of 2.25 percent to 2.5 percent.
Under Fed Chairman Jerome Powell, the central bank has shifted away from its past approach of cautiously trying to rein in the pace of tightening, in which it raises short-term interest rates to ensure that inflation does not outpace its 2 percent target.
The tightening under Powell has been driven by a healthy U.S. economy that has prompted the Fed to project further rate hikes this year. At the latest meeting of the Fed’s policy-setting committee, held in July, officials forecast three rate hikes for 2018.
Concerns about the high level of inflation have led some officials to push back against the expectation of additional rate hikes, arguing that they should be carefully assessing the impact of recent rate hikes on borrowing costs before embarking on further tightening.
“The committee continues to assess both the upside and downside risks to the economic outlook,” Fed policymakers said in a statement following the Fed’s latest meeting.
“Accordingly, the committee decided to raise the target range for the federal funds rate to 2 percent,” they said. “The stance of monetary policy remains accommodative, thereby supporting further strengthening in labor market conditions and a sustained return to 2 percent inflation.”
Investors largely anticipated the rate increase, even though some recent Fed surveys have shown they doubt the outlook for the U.S. economy is as strong as it seems. Also at issue is the timing of the next rate hike. At the most recent meeting of the Fed’s policy-setting committee, the panel committed to raising rates four times this year, including the most recent announcement. But those estimates did not appear to be widely supported.
After two increases in 2017, according to a consensus of economists surveyed by the Washington Post, economists at the Fed are likely to watch closely for any signs that the U.S. economy is losing steam.
A separate survey of Fed officials released Wednesday found that most of them still expected two or three further rate hikes this year, but the vast majority were less optimistic than they were in June, and more than a third predicted three.
Also up for consideration at the Fed is the possibility of a fourth rate hike this year, provided that inflation remains within the Fed’s 2 percent target.
With a limited range of inflation readings, Fed officials are watching inflation gauges carefully and have recently begun a shift in their expectations for inflation. For a long time, they had viewed price rises as being consistent with a normal, steady and gradual economy, where wages grow at a modest pace and inflation remains relatively tame.
But with the collapse of the job market in 2010, inflation has become an important concern. Since then, the Fed has increased rates at a pace that is faster than most analysts thought would be necessary to counter the threat of runaway inflation.
The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, or PCE, was up 2.1 percent in June from a year earlier.
That is slightly higher than the typical level of inflation in the U.S. during the 20th century, but a decent-sized jump nonetheless, economists note.
Inflation readings for July are due out next month, and if they rise further, the Fed is likely to raise rates again in September, a move that would keep borrowing costs rising at their current pace.
“We continue to project three hikes this year,” said Nick Bennenbroek, a chief currency strategist at Wells Fargo. “There are also questions about how well-behaved prices are becoming.”
One factor may be that companies have brought forward purchases of new computers, TVs and other electrical equipment that are often bought ahead of new model years.