As is frequently the case, it’s not so much what the Federal Reserve did today as what Fed chair Janet Yellen said.
At its meeting today the Fed’s Open Market Committee raised the central bank’s benchmark short-term interest rate 25 basis points to a range of 0.75% to 1%, just as Wall Street expected.
But then Yellen proceeded to put most of Wall Street’s fears to bed in her press conference.
The central bank is willing to tolerate inflation temporarily overshooting its 2% target, she said. In other words the Fed is in no rush to raise rates again and again in 2017.
In its forecast the Fed indicated two more 25-basis-point rate increases in 2017 for a total of three this year–not four as Wall Street had talked itself into fearing this week. And then three rate increases in 2018. Both of those forecasts are unchanged from the Fed’s December projections.
The Fed also didn’t raise its projections for inflation, pointing to an end of 2017 inflation rate of 1.9% and then 2% for both 2018 and 2019. Wall Street had worried that the Fed would raise its inflation forecasts, thus signaling the need for more aggressive interest rate increases.
Yellen also reiterated that the Fed hasn’t made any decision on when to begin selling Treasuries and mortgage-backed securities out of its $4.5 trillion portfolio, and that the Fed would maintain its current policy of reinvesting cash from any maturing assets. Wall Street had feared that Yellen would signal that the Fed had decided when it would begin shrinking its balance sheet.
Yellen did leave open the possibility that the Fed would modify policy if the Trump administration and Congress passed big fiscal stimulus packages, but also noted that the Fed would wait to react until it saw more concrete policy proposals on this front.