The Federal Reserve has defied a string of weak inflation figures as it lifted short-term rates by another quarter point and set out detailed plans for paring back the size of its balance sheet later this year.
Fed chair Janet Yellen and her colleagues boosted the target range for the federal funds rate of 1 to 1.25 per cent on Wednesday, reiterating that they expect inflation to return to target but stressing they are watching low inflation numbers “closely” after a series of disappointing readings.
Fed policymakers stuck with forecasts pointing to further rate increases in the coming years, including a further quarter-point increase by the end of 2017.
Ms Yellen said in a press conference that the rate rise reflected the “progress the economy has made and is expected to make towards the maximum employment and price stability objectives assigned to us by law.” She added that economic growth appeared to have rebounded from earlier this year. “We continue to expect that the economy will expand at a moderate pace in the next few years.”
Mr Yellen also acknowledged the weaker inflation readings of late, but insisted they were significantly driven by one-off reductions in categories of prices such as wireless telephone services and prescription drugs. “The committee still expects inflation to move up and stabilise at around 2 per cent in the next couple of years,” said Ms Yellen.
“We continue to expect the ongoing strength of the economy will warrant gradual increases in the federal funds rate to sustain a healthy labour market and stabilise inflation around our 2 per cent longer-run objective.”
For the first time the Fed’s post-meeting statement confirmed that policymakers expect to begin a “normalisation” programme that will reduce the size of a balance sheet that was swollen during crisis-era interventions. In a separate document the Fed for the first time gave detailed figures for how it plans to phase out reinvestments of the proceeds of maturing securities on its $4.5tn balance sheet.