Federal Reserve raises interest rates amid stronger inflation


WASHINGTON, June 13 (Reuters) - The Federal Reserve raised interest rates on Wednesday, a move that was widely expected but still marked a milestone in the U.S. central bank's shift from policies used to battle the 2007-2009 financial crisis and recession.

In raising its benchmark overnight lending rate a quarter of a percentage point to a range of between 1.75 percent and 2 percent, the Fed dropped its pledge to keep rates low enough to stimulate the economy "for some time" and signaled it would tolerate above-target inflation at least through 2020.

The Fed has raised rates seven times since late 2015 on the back of the economy's continuing expansion and solid job growth, rendering the language of its previous policy statements outdated.

Inflation is also snapping into line, with fresh projections from policymakers on Wednesday indicating it would run above the central bank's 2 percent target, hitting 2.1 percent this year and remaining there through 2020.

Policymakers projected a slightly faster pace of rate increases in the coming months, with two additional hikes expected by the end of this year, compared to one previously.

They see another three rate increases next year, a pace unchanged from their previous forecast.

"The labor market has continued to strengthen ... economic activity has been rising at a solid rate," the central bank's rate-setting Federal Open Market Committee said in its unanimous statement after the end of a two-day meeting.

"Household spending has picked up while business fixed investment has continued to grow strongly," the Fed said.

U.S. Treasury yields rose after the release of the statement while U.S. stocks were trading marginally lower. The dollar pared losses against a basket of currencies.

Fed Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT).

More on Jerome Powell:

20 PHOTOS
Trump nominates Jerome Powell to lead U.S. Federal Reserve
See Gallery
Trump nominates Jerome Powell to lead U.S. Federal Reserve
US President Donald Trump shakes hands as he announces his nominee for Chairman of the Federal Reserve, Jerome Powell, in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump announces his nominee for Chairman of the Federal Reserve, Jerome Powell (L), in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump announces his nominee for Chairman of the Federal Reserve, Jerome Powell (L), in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
Jerome Powell listens as US President Donald Trump announces Powell as nominee for Chairman of the Federal Reserve in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
Jerome Powell listens as US President Donald Trump announces Powell as nominee for Chairman of the Federal Reserve in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
U.S. President Donald Trump announces Jerome Powell as his nominee to become chairman of the U.S. Federal Reserve in the Rose Garden of the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria
US President Donald Trump announces his nominee for Chairman of the Federal Reserve, Jerome Powell, in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
U.S. President Donald Trump, left, and Jerome Powell, governor of the U.S. Federal Reserve and Trump's nominee for chairman of the Federal Reserve, walk to a nomination announcement in the Rose Garden of the White House in Washington, D.C., U.S., on Thursday, Nov. 2, 2017. If approved by the Senate, the 64-year-old former Carlyle Group LP managing director and ex-Treasury undersecretary would succeed Janet Yellen. Photographer: Andrew Harrer/Bloomberg via Getty Images
Jerome Powell (R) speaks after being nominated for Chairman of the Federal Reserve by US President Donald Trump (L) in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump announces his nominee for Chairman of the Federal Reserve, Jerome Powell, in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump (L) signals the end of ceremony after announcing Jerome Powell (R) as nominee for Chairman of the Federal Reserve in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
Jerome Powell (R) speaks after being nominated for Chairman of the Federal Reserve by US President Donald Trump (L) in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump walks with Jerome Powell, his nominee to be Federal Reserve chairman, at the White House in Washington, DC, on November 2, 2017. / AFP PHOTO / NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
US President Donald Trump walks with Jerome Powell, his nominee to be Federal Reserve chairman, at the White House in Washington, DC, on November 2, 2017. / AFP PHOTO / NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
US President Donald Trump walks with Jerome Powell, his nominee to be Federal Reserve chairman, at the White House in Washington, DC, on November 2, 2017. / AFP PHOTO / NICHOLAS KAMM (Photo credit should read NICHOLAS KAMM/AFP/Getty Images)
Jerome Powell (R) leaves with US President Donald Trump leave after he was nominated for Chairman of the Federal Reserve in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
US President Donald Trump shakes hands with his nominee for Chairman of the Federal Reserve, Jerome Powell (R), in the Rose Garden of the White House in Washington, DC, November 2, 2017. / AFP PHOTO / SAUL LOEB (Photo credit should read SAUL LOEB/AFP/Getty Images)
U.S. President Donald Trump arrives shakes hands with Jerome Powell, his nominee to become chairman of the U.S. Federal Reserve at the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria
U.S. President Donald Trump announces Jerome Powell as his nominee to become chairman of the U.S. Federal Reserve in the Rose Garden of the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria
U.S. President Donald Trump arrives in the Rose Garden to announce Jerome Powell as his nominee to become chairman of the U.S. Federal Reserve at the White House in Washington, U.S., November 2, 2017. REUTERS/Carlos Barria
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point. The trajectory of U.S. inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path," said Aaron Anderson, senior vice president of research at Fisher Investments.

The Fed's short-term policy rate, a benchmark for a host of other borrowing costs, is now roughly equal to the rate of inflation, a breakthrough of sorts in the central bank's battle in recent years to return monetary policy to a normal footing.

Though rates are now roughly positive on an inflation-adjusted basis, the Fed still described its monetary policy as "accommodative," with gradual rate increases likely warranted as a sturdy economy enters a 10th straight year of growth.

Estimates of longer-run interest rates were unchanged and seen reaching as high as 3.4 percent in 2020 before dropping to 2.9 percent in the longer run.

FED CONFIDENCE

The Fed now sees gross domestic product growing 2.8 percent this year, slightly higher than previously forecast, and dipping to 2.4 percent next year, unchanged from policymakers' March projections. The unemployment rate is seen falling to 3.6 percent in 2018, compared to the 3.8 percent forecast in March.

The rate increase was in line with investors' expectations and showed policymakers' confidence in the economy's growth prospects, continued low unemployment and steady inflation. Investors had given just over a 91 percent chance of a rate rise on Wednesday, according to an analysis by CME Group.

The Fed said its policy of further gradual rate increases will be "consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective."

In a technical move, the central bank also decided to set the interest rate it pays banks on excess reserves - its chief tool for moderating short-term interest rates - at just below the upper level of its target range. The step was needed, the Fed said, to be sure rates stay within the intended boundaries.

The policy statement bypassed discussion about the tensions over the Trump administration's trade policies, including a decision two weeks ago to impose tariffs on steel and aluminum imports from the European Union, Canada and Mexico.

Individual Fed policymakers have expressed concerns about the economic risks of a broad tit-for-tat tariff retaliation, but have said they would not change their policies or forecasts until those risks are realized.

(Reporting by Howard Schneider Editing by Paul Simao)

Read Full Story

Markets

DJIA 25,585.44 423.03 1.68%
NASDAQ 7,815.88 41.77 0.54%
NIKKEI 225 22,192.04 -12.18 -0.05%
HANG SENG 27,100.06 -223.53 -0.82%
DAX 12,237.17 74.16 0.61%
USD (per EUR) 1.14 0.00 0.22%
USD (per CHF) 1.00 0.00 0.34%
JPY (per USD) 110.88 0.31 0.28%
GBP (per USD) 1.27 0.00 0.15%