The US Federal Reserve on Wednesday raised interest rates, but left its rate outlook for the coming years unchanged even as policymakers projected a short-term jump in economic growth from US President Donald Trump administration’s proposed tax cuts.
In an early verdict on the tax overhaul, Fed policymakers said it would boost the economy next year, but leave no lasting effect, with the long-run potential growth rate stalled at 1.8 percent.
The White House has frequently said its tax plan would produce annual GDP growth of 3 to 4 percent.
The expected fiscal stimulus, coming on the heels of a flurry of relatively bullish data, cleared the way for the central bank to raise rates by a quarter of a percentage point to a range of 1.25 to 1.50 percent. It was the third rate hike this year.
However, the Fed’s forecast of three additional rate increases next year and in 2019 was unchanged from its projections in September, a sign that the tax legislation moving through US Congress would have a modest, and possibly fleeting, effect.
Fed Chair Janet Yellen, at her final news conference before her term ends in February, signaled an all-clear for the US economy a decade after the onset of the recession from 2007 to 2009.
“At the moment the US economy is performing well. The growth that we’re seeing, it’s not based on, for example, an unsustainable buildup of debt ... The global economy is doing well, we’re in a synchronized expansion,” Yellen said.
“There is less to lose sleep about now than has been true for quite some time, so I feel good about the economic outlook,” she added.
However, the central bank’s projections also contained some potential dilemmas for incoming Fed chair Jerome Powell.
The Fed now envisions a burst of growth, ultra-low unemployment of below 4 percent next year and 2019, and continued low interest rates — yet little movement on inflation.
Yellen said the persistent shortfall of inflation from the Fed’s 2 percent goal was the major piece of “undone work” she was leaving for Powell to figure out.
In its justification for Wednesday’s rate increase, which was widely expected by financial markets, the Fed’s policy-setting committee cited “solid” economic growth and job gains.
The Fed now sees GDP growing 2.5 percent next year, up from the 2.1 percent forecast in September. The pace of growth is expected to cool to 2.1 percent in 2019, slightly higher than the prior forecast of 2.0 percent.
“Changes in tax policy will likely provide some lift to economic activity in coming years,” Yellen said, adding that “the magnitude and timing of the macroeconomic effects of any tax package remain uncertain.”
The impact would “mainly” work to raise aggregate demand as households and companies have more money to spend, with “some potential” to raise investment and the economy’s longer-term growth, Yellen said.
The Fed also on Wednesday said it expected the nation’s unemployment rate would fall to 3.9 percent next year and remain at that level in 2019, well below what is considered to be full employment. It previously had forecast a jobless rate of 4.1 percent for those two years.
However, inflation is projected to remain shy of the central bank’s goal for another year, with weakness on that front still enough of a concern that policymakers saw no reason to accelerate the expected pace of rate increases.
Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari were dissenters in the Fed policy statement on Wednesday.
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