The Federal Reserve on Thursday increased the benchmark interest rate a quarter point to a target range of 1.5 % to 1.75 %, citing a stronger US economic outlook in recent months.
“This decision marks another step in the ongoing process of gradually scaling back monetary policy accommodation, a process that has been underway for several years now,” Federal Reserve Board Chairman Jerome Powell told reporters at his maiden news conference.
Noting that job gains averaged 240,000 per month over the past three months, well above the pace needed in the longer-run to absorb new entrants into the labour force and unemployment rate remained low in February.
The Fed expects that the job market will remain strong.
Although the growth rates of household spending and business investment appear to have moderated earlier this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid.
“Indeed, the economic outlook has strengthened in recent months. Several factors are supporting the outlook, fiscal policy has become more simulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory and overall financial conditions remain accommodating,” Powell said.
“Against this backdrop, inflation remains below our two % longer-run objective. Overall, consumer prices, as measured by the price index for personal consumption expenditures increased 1.7 % in the 12 months.
Powell said the decision to raise the federal funds rate is another step in the process of gradually scaling back the monetary policy accommodation. By contrast, raising rates too slowly would raise the risk that monetary policy.
In the committee’s view, further gradual increases in the federal funds rate will best promote these goals.
“At the same time, we want to avoid inflation running persistently below our objective, which could leave us with less scope to counter an economic downturn in the future. Participants projections of the appropriate path for the federal funds rate reflect our gradual approach,” he added.
The median projection for the federal funds rate is 2.1 % at the end of this year, 2.9 % at the end of 2019 and 3.4 % at the end of 2020
Powell said he is trying to take the “middle ground” when it comes to rate increase.
“On the one hand, the risk would be that we wait too long and then we have to raise rates quickly. And that foreshortens the expansion. We don’t want to do that. On the other side, if we raise rates too quickly, inflation then really doesn’t get sustainably up to two %, and that will hurt us going forward,” he said.
