WASHINGTON – Federal Reserve policymakers have slightly lowered their projections for short-term interest rates over the next three years, a sign that policymakers may move slowly after their first rate increase in seven years.
The Fed on Wednesday lifted its key interest rate by a quarter point to a range of 0.25 to 0.5 per cent, up from near zero for the first time since December 2008.
More Fed policymakers now expect the short-term rate will be 1.38 per cent or below at the end of 2016 than in previous projections in September. And they forecast the rate will be 2.38 per cent at the end of 2017 and 3.25 per cent at the end of 2018, both a quarter-point lower than in September, according to projections released Wednesday.
Still, the Fed’s forecasts for the U.S. economy and interest rates have proven too optimistic for most of the recovery from the Great Recession. A year ago, for example, their projection for short-term rates at the end of 2016 was nearly double what it is now.
The projections show that Fed officials are coalescing around an expectation of four rate hikes next year. Still, fewer hikes are possible: Four officials project there will be just two hikes, double the number in September, and three expect three rate hikes.
Fed officials’ expectations for the economy didn’t change much. They project the economy will grow 2.4 per cent next year, just a tenth of a percentage point higher than in September. They also foresee unemployment will fall to 4.7 per cent by the end of next year, from its current rate of 5 per cent. That’s down slightly from the previous forecast of 4.8 per cent.
While the Fed says it is confident that inflation will reach its 2 per cent target, it does not project that happening until the end of 2017, when it forecasts a 1.9 per cent inflation rate.