US Fed hikes key interest rate; says economic outlook stronger

The Federal Reserve today increased the benchmark interest rate a quarter point to a target range of 1.5 per cent to 1.75 per cent, citing a stronger US economic outlook in recent months.

"This decision marks another step in the ongoing process of gradually scaling back monetary policy accommodation, a process that has been underway for several years now," Federal Reserve Board Chairman Jerome Powell told reporters at his maiden news conference.

Noting that job gains averaged 240,000 per month over the past three months, well above the pace needed in the longer-run to absorb new entrants into the labour force and unemployment rate remained low in February, at 4.1 per cent, Powell said that's a "sign of improvement".

The Fed expects that the job market will remain strong.

Although the growth rates of household spending and business investment appear to have moderated earlier this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid, he said.

"Indeed, the economic outlook has strengthened in recent months. Several factors are supporting the outlook, fiscal policy has become more simulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory and overall financial conditions remain accommodating," Powell said.

"Against this backdrop, inflation remains below our two per cent longer-run objective. Overall, consumer prices, as measured by the price index for personal consumption expenditures increased 1.7 per cent in the 12 months ending in January," he said.

Powell said the decision to raise the federal funds rate is another step in the process of gradually scaling back monetary policy accommodation, as the economic expansion continues.

"This gradual process has been underway for more than two years. It has served and should continue to serve the economy well. In making our policy decisions over the next few years, we will continue to aim for inflation of two per cent, while sustaining the economic expansion and a strong labour market," he said.

In the committee's view, further gradual increases in the federal funds rate will best promote these goals.

By contrast, raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion, he said.

"At the same time, we want to avoid inflation running persistently below our objective, which could leave us with less scope to counter an economic downturn in the future. Participants projections of the appropriate path for the federal funds rate reflect our gradual approach," he added.

The median projection for the federal funds rate is 2.1 per cent at the end of this year, 2.9 per cent at the end of 2019 and 3.4 per cent at the end of 2020. By 2020, the median federal funds rate is modestly above its estimated longer-run trend, he said.

Responding to questions, Powell said he is trying to take the "middle ground" when it comes to rate increase.

"On the one hand, the risk would be that we wait too long and then we have to raise rates quickly. And that foreshortens the expansion. We don't want to do that. On the other side, if we raise rates too quickly, inflation then really doesn't get sustainably up to two per cent, and that will hurt us going forward," he said.

"So we're trying to take that middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal funds rate, as long as the economy is broadly on its path," Powell said.