Washington: The US Federal Reserve raised interest rates on Wednesday and forecast at least two more hikes for 2018, signaling growing confidence that US tax cuts and government spending will boost the economy and inflation and lead to more aggressive future tightening.
In its first policy meeting under new Federal Reserve (Fed) chief Jerome Powell, the US central bank indicated that inflation should finally move higher after years below its 2 per cent target and that the economy had recently gained momentum. Powell took over from former chief Janet Yellen in early February.
The Fed also raised the estimated longer-term "neutral" rate, the level at which monetary policy neither boosts nor slows the economy, a touch, in a sign the current gradual rate hike cycle could go on longer than previously thought.
"The economic outlook has strengthened in recent months," the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 per cent to 1.75 per cent.
Inflation "is expected to move up in coming months and stabilise" around the Fed's target, it said.
The rate hike was expected. All 104 economists polled by Reuters from March 5-13 said the Fed would increase borrowing costs this week.
The move was the latest step away from years of stimulating the world's largest economy in the wake of the 2007-2009 financial crisis and recession. The Fed tightened policy three times last year.
The combination of $1.8 trillion in expected fiscal stimulus and recent hints of price and wage pressures had prompted some Fed officials to speculate that more Americans could be drawn into an already tight labour market and that inflation could rise to the target, or even well above if the economy got too hot.
Policymakers were largely split on Wednesday as to whether a total of three or four rate hikes would be needed this year. They predicted rates would rise three times next year and two times in 2020, a further indication of confidence in the economy.
They projected US economic growth of 2.7 per cent in 2018, an increase from the 2.5 per cent forecast in December, and also marked up growth for next year. The Fed's preferred measure of inflation was expected to end 2018 at 1.9 per cent, unchanged from the previous forecast, but it is seen rising a bit above the Fed's target next year.