Federal Reserve officials raised interest rates for the firsttime this year and forecast a steeper path for borrowing costs in2017, saying inflation expectations have increased “considerably”and suggesting the labor market is tightening.

The Federal Open Market Committee cited “realized and expectedlabor market conditions and inflation” in increasing its benchmarkrate a quarter percentage point, according to a statement Wednesdayfollowing a two-day meeting in Washington. New projections showcentral bankers expect three quarter-point rate increases in 2017,up from the two seen in the previous forecasts in September, basedon median estimates.

The central bank said monetary policy supports “some furtherstrengthening in labor market conditions and a return to 2 percentinflation,” adding the word “some” in an indication that officialssee less room for improvement in the job outlook. The word“strengthening” also replaced “improvement.”

Inflation has firmed toward policy makers' 2% target,unemployment has dipped further and President-elect Donald Trumphas pledged growth-fueling tax cuts and infrastructure spendingthat could warrant a faster pace of Fed tightening. Trump hasaccused Fed Chair Janet Yellen of keeping rates low to helpDemocrats, a charge she denied. Now, higher interest rates have thepower to blunt the impact of any fiscal stimulus.

The FOMC didn't include language in its post-meeting statementexplicitly referring to changes in fiscal policy.

Wednesday's interest-rate increase, only the second since thecentral bank cut borrowing costs to near-zero in 2008, was bothtelegraphed by Fed officials in recent weeks and widely anticipatedin financial markets, with futures traders putting the probabilityat 100%.

Yields on benchmark 10-year notes surged after Wednesday'sdecision and the Bloomberg Dollar Spot Index reversed an earlierdecline from Tuesday.

All 103 analysts surveyed by Bloomberg News had projected a hikeon Wednesday. Economists saw two rate increases in 2017, accordingto the average probability in a separate survey of 41 respondentsconducted Dec. 8-12.

The FOMC's decision was unanimous for the first time since July.The move brings the target for the federal funds rate — theovernight lending rate between banks — to a range of 0.5% to 0.75%.That will potentially lead to marginally higher borrowing costs forconsumers and companies while giving savers a boost.

Recent information shows that “the labor market has continued tostrengthen and that economic activity has been expanding at amoderate pace since mid-year,” the central bank said in itsstatement. Job gains have been “solid,” consumer spending is“rising moderately” and business investment “has remained soft,”the Fed said.

'Roughly Balanced'

Officials repeated that near-term risks to their outlook are“roughly balanced.”

Fed officials continue to project three quarter-point rateincreases in 2018, based on median federal funds forecasts of1.375% in 2017 and 2.125% the following year.

The Fed's projections show little change from September in theoutlook for growth, unemployment and inflation over the next threeyears. Policy makers see gross domestic product growing 2.1% in2017, up from a previous forecast of 2%.

Policy makers slightly reduced their outlook for unemployment in2017 to a fourth-quarter level of 4.5%. Joblessness sank to 4.6% inNovember, a nine-year low.

The median projection for the longer-run federal funds rateincreased to 3%, a small shift from about 2.9% in September. Thatprojection had been on a downward trend.

The Fed had expected to make four quarter-point increases thisyear when surveying the outlook in December 2015. But its forecastwas thwarted by a range of headwinds including China-spurredturmoil in financial markets and Britain's vote to leave theEuropean Union.

Jobs Added

Despite global risks, the domestic economy has moved closer tothe Fed's goals. In addition to the drop in unemployment, thecountry has added 180,000 jobs a month on average this year.

Meanwhile, inflation has steadily approached the Fed's 2% goal.The central bank's preferred index of consumer prices climbed 1.4%in the year through October. Core inflation, which strips outvolatile fuel and food, is running at 1.7%.

With bond yields rising sharply since Trump's Nov. 8 victory inanticipation of higher inflation, the Fed said Wednesday that“market-based measures of inflation compensation have moved upconsiderably but still are low; most survey-based measures oflonger-term inflation expectations are little changed, on balance,in recent months.”

Trump, who will be inaugurated as U.S. president on Jan. 20, haspledged as much as $1 trillion in infrastructure investment andcuts to corporate and individual income taxes. But the planshaven't been thoroughly detailed, and what will actually be backedby Congress is even less clear.

The Fed meets next on Jan. 31 and Feb. 1 in Washington, thoughthat meeting won't be accompanied by economic projections or apress conference. The next gathering with a press briefing takesplace March 14-15.

Bloomberg News

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