WASHINGTON — The Federal Reserve said Friday it expects the U.S. economy will strengthen and warrant further gradual increases in its key interest rate.
That rate forecast was included in the Fed’s semi-annual monetary report to Congress, which Chair Janet Yellen will deliver to Congress next week. The Fed has raised interest rates three times since December, pushing its benchmark rate to a range of 1 per cent to 1.25 per cent. The Fed noted that policymakers still expect one more rate hike this year and another three hikes in 2018.
The Fed said this projected pace of hikes would still allow the labour market to keep strengthening and inflation to climb to the Fed’s 2 per cent target. The Fed also signalled that it expects to begin reducing its massive bond holdings this year.
The Fed’s “Monetary Policy Report,” presented twice a year, cited a number of reasons to be optimistic about the economy.
The report said while consumer spending, which accounts for 70 per cent of economic activity, was sluggish at the start of 2017, it “appears to have rebounded recently supported by job gains, rising household wealth and favourable consumer sentiment.” Likewise, business investment has accelerated, the Fed said after being weak for much of 2016, helped by a surge in spending on drilling and mining activity.
“The committee currently expects that the ongoing strength in the economy will warrant gradual increases in the federal funds rate,” the report said, referring to the Fed’s key policy rate.
The government reported Friday that employers added a bigger-than-expected 222,000 jobs in June, the most in four months. Analysts predicted the size of the June gain would keep the Fed on track to raise rates again. Many say the next rate hike will likely occur in September, after which the Fed will begin trimming its bond holdings.
The Fed’s $4.5 trillion balance sheet is five times the size of the holdings it had in the summer of 2008 before the worst financial crisis in seven decades. That pushed the country into a deep recession and forced the central bank to cut its federal funds rate to a record low near zero and use an array of policy tools to jump-start economic growth. The bonds were purchased in an effort to keep long-term interest rates low.
The monetary report is normally released on the first day of Yellen’s congressional testimony that accompanies the report. The Fed said it was releasing the report early in an effort to give lawmakers more time to study the contents before Yellen’s testimony.
The report said that even though inflation has slowed a bit since the beginning of the year, the central bank still expects price gains to resume rising toward the 2 per cent target, helped in part by stronger wage gains.
At the Fed’s meeting last month, it outlined a plan to begin selling an initial amount of maturing bonds of no more than $6 billion a month in Treasury securities and no more than $4 billion a month in mortgage bonds.