The Federal Reserve on Wednesday raised interest rates by 0.25 points, the first increase under new Chairman Jerome Powell.
The Fed raised the federal funds rate to a 1.5-1.75 percent target range after months of data showing a strong economy. A March rate hike had been widely expected as unemployment nears record lows and economic growth is expected to pick up in 2018.
The decision comes as economists attempt to nail down what to expect from a growing U.S. economy in 2018. As the U.S. continues its slow but steady recovery from the 2008 recession, policymakers are split over how aggressive the Fed should be in raising interest rates.
The Fed has been aiming to bring interest rates higher while the economy is strong to give the bank more room to cut them in case of a crisis. The bank must also balance support for a growing economy with concerns that rapid expansion could lead to rampant inflation. Raising rates too quickly could stunt growth, while waiting too long could risk swift price increases if the economy overheats.
Under Powell’s predecessor Janet Yellen, the Fed projected three interest rate hikes in 2018. Powell voted in lockstep with Yellen since joining the Fed, and is expected to follow a similar path.
Fed officials on Wednesday projected a 2.1 percent median interest rate by year’s end, unchanged from December. While the Fed on the whole is forecasting another two rate hikes, in line with December’s projection, some officials projected a fourth 2018 rate hike this month. Seven Fed board members predicted three or more additional rate hikes, while 8 officials projected two or fewer.
Powell has said the Fed will gradually raise interest rates toward historic averages while the economy continues to expand, and urged caution when weighing individual Fed officials’ predictions.
“We made one decision at this meeting,” Powell said, referring to the unanimous call to raise rates. “I think like any set of forecasts, those forecasts will change over time and they will change depending on the way the outlook for the economy changes.”
With a 4.1 percent unemployment rate, the U.S. is within range of what the Fed considers the ideal job market in a stable economy.
Tightness in the labor market has not spurred consistently higher rates of wage growth. But analysts expect the impact of the U.S. tax cuts and increased federal spending to grow the economy.
The Fed upgraded its outlook for the economy, which the bank said “strengthened in recent months,” and said inflation is “expected to move up in coming months.”
Inflation has lagged for months behind the Fed’s 2 percent target range as measured by the personal consumption expenditures index.
Wall Street grew concerned earlier this year that the Fed would raise rates more than three times. Rate hikes tend to temper investment, which means signs of inflation, like increasing wage growth, often lead to stock sell-offs from traders fearing future Fed action.
“There’s no sense in the data that we’re on the cusp of an acceleration in inflation,” Powell said Tuesday, insisting it would come closer the the 2 percent target as one-time drops in certain prices last year are phased out of the 12-month data set.
Inflation fears spiked on Wall Street in late January after economic data showed the highest rate of wage growth in several years. Wages increased 2.9 percent in 2017, the best rate since May 2009. The Dow Jones industrial average and the S&P 500 index both lost more than 10 percent of their value as stocks plunged, while the Nasdaq just barely avoided that level.
Powell said during February appearances before Congress that data pointed to faster growth, and that Fed officials would likely improve their economic forecasts. He declined to say how that would bear out in the Fed’s rate hike projections.
The February employment report released one week later said that U.S. economy added 313,000 jobs in that month, the fastest pace of growth since summer of 2016. The unemployment rate was 4.1 percent for the fifth straight month, the lowest level since December 2000. February jobs far exceeded projections, and the month was the best for labor growth since July 2016.
Updated at 3:51 p.m.