The Federal Reserve raised its benchmark interest rate on Wednesday for the first time in a year and signaled that rates could continue to rise next year more quickly than officials had expected.
But unlike corporate executives and stock traders, Fed officials do not appear to be anticipating a massive growth boost next year from economic policies implemented by President-elect Donald Trump, but they appear set to raise rates faster if those policies were to cause an overheating in the economy.
Markets were slightly up immediately after the announcement, but they started to dive about an hour later, after Fed Chair Janet L. Yellen concluded a news conference about the rate hike. The Dow Jones industrial average closed down 0.6 percent, the Standard & Poor's 500-stock index slid 0.8 percent, and the Nasdaq tech index was down 0.5 percent.
Yellen told reporters that she and the Federal Open Market Committee were “recognizing the considerable progress the economy has made” toward full employment and an inflation target of 2 percent. She indicated that she did not see much need for a large, deficit-financed boost from federal fiscal policy, either tax cuts or spending increases.
“I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment,” Yellen said. She then added that she was not trying to advise Trump and Congress on fiscal issues.
Economic projections also released by the central bank indicate that the Fed now expects the economy to grow 1.9 percent in 2016 and 2.1 percent in 2017. The projections show that the group expects the Fed to increase rates three times in 2017, to a rate of 1.4 percent by year's end. Its September projections signaled only two expected hikes next year.
Analysts have warned that if Trump and Congress agree to slash tax rates and increase spending in areas such as infrastructure the Fed could be forced to raise rates faster than expected to counter rising prices.
Yellen highlighted uncertainty over those policies at her news conference but said some Fed officials had tried to incorporate expected fiscal changes in their forecasts. Since Trump’s election, markets have jumped — with the Dow closing in on a record-breaking 20,000 — and long-term rates and the dollar have increased.
Several analysts said the Fed was right to take that approach to the new administration’s policies. “The Fed will likely be in wait-and-see mode, given this substantial policy uncertainty,” said Doug Duncan, the chief economist at Fannie Mae, “and we view this prudency a virtue.”
Much of the Fed statement released Wednesday was unchanged from November, when the Fed declined to raise rates, choosing “to wait for some further evidence of continued progress” toward maximum employment in the economy and a target inflation rate of 2 percent. Officials said Wednesday, as they said a month ago, that “near-term risks to the economic outlook appear roughly balanced” — meaning growth is as likely to speed up as it is to slow down.
Fed officials now judge the overall inflation rate to be 1.5 percent, up from 1.3 percent in September, but still well below target. They judge core inflation, which excludes volatile commodities such as gasoline prices, to be 1.7 percent.
In the statement, officials said that “inflation has increased since earlier this year,” a change from November, when the statement said that “inflation has increased somewhat since earlier this year.” Officials also said that measures of inflation compensation “have moved up considerably but remain low.” Last month, the word “considerably” did not appear in that line.
The Fed's decision drew criticism from some liberal economists who want rates to stay as low as possible to further boost employment while inflation remains below target.
“The Fed's action today was unwelcome but not unexpected. Still huge economic risks and little evidence of an inflation problem” economist and former treasury secretary Larry Summers wrote in a tweet.
Yellen, in her news conference, said she does not favor running a “high-pressure economy” where inflation might overshoot its target. “I do want to make clear,” she said, “that I have not recommended running a hot economy as some sort of experiment.”
The central bank last raised rates at its December meeting a year ago, its first step toward moving the Fed from what economists call the zero-lower bound — meaning interest rates hovering around zero percent.
Trump has promised to cut taxes for individuals and corporations and to boost infrastructure spending by as much as $1 trillion through tax credits that his team says will pay for themselves.
Although Trump praised the Fed chair during his campaign, saying he has “great respect” for Yellen, he was mostly critical. Accusing Yellen and the Fed of keeping rates low to help President Obama, Trump said in September: “I think she is very political, and to a certain extent, I think she should be ashamed of herself.”
Yellen's term ends in early 2018. Asked about whether she would leave her post when the president-elect takes office, the Fed chair said: “I do intend to serve out my four-year term. I haven’t made any decision about the future.”
Analysts did not expect Fed officials to change their forecasts of future increases this month based on an expectation of what Trump and Congress might do.
“We very much doubt that FOMC members want to be accused of seeking to influence Congress and the new administration,” analysts at Pantheon Macroeconomics wrote this week, “given how unpopular the Fed is already with Republican politicians.”