The Federal Reserve raised its benchmark lending rate a quarterpoint and continued to project two more increases this year,signaling more vigilance as inflation approaches its target.

“In view of realized and expected labor market conditions andinflation, the committee decided to raise the target range for thefederal funds rate,” the Federal Open Market Committee said in itsstatement Wednesday. “Near-term risks to the economic outlookappear roughly balanced.”

Investors had almost fully expected the increase to a range of0.75% to 1% following unusually clear signals from policy makersincluding Chairwoman Janet Yellen, who explained the committee'sthinking at a press conference in Washington.

“Our decision to make another gradual reduction in the amount ofpolicy accommodation reflects the economy's continued progress,”she told reporters. “Today's decision is in line with that view,and does not represent a reassessment.”

Yields on two-year U.S. Treasuries declined about 6 basis pointsto 1.31% at 2:51 p.m. in New York and 10-year yields fell 9 basispoints to 2.51%. The S&P 500 Index of U.S. stocks was up 0.6%at 2,379.56.

“I'm a little bit surprised” Fed officials continued to forecasta total of three rate increases this year, said Daniel North, chiefeconomist at credit insurer Euler Hermes. “Inflation is rising, soI've been thinking they would project four hikes to keep thefinancial markets prepared” for a more rapid pace of ratemoves.

The U.S. economy has mostly met the central bank's goals of fullemployment and stable prices, and may get further support ifPresident Donald Trump delivers promised fiscal stimulus.

For now, officials stuck with their “gradual” approach totightening monetary policy, while removing the word “only” when aprevious statement called the approach “only gradual.” Centralbankers left unchanged their median projections for three quarterpercentage-point increases in 2018, while the median fed funds rateestimate for 2019 rose to 3% from 2.9%.

They also repeated a commitment to maintain their balance-sheetreinvestment policy until rate increases were well under way.Yellen said officials had discussed the process of reducing thebalance sheet gradually, but had made no decisions and wouldcontinue to debate the topic.

The FOMC made several changes to their language oninflation.

“The committee will carefully monitor actual and expectedinflation developments relative to its symmetric inflation goal,”the Fed said in the statement. “The committee expects that economicconditions will evolve in a manner that will warrant gradualincreases in the federal funds rate.”

The committee described job gains as “solid” and said businessinvestment “appears to have firmed somewhat.” Inflation, thestatement said, is “moving close” to the committee's 2% target.

Lone Dissenter

Minneapolis Fed President Neel Kashkari voted against thedecision to hike rates, dissenting in favor of a hold. He was theonly contrary vote on the committee.

Inflation was forecast to reach 1.9% in the fourth quarter thisyear, and 2% in both 2018 and 2019, according to quarterly medianestimates released with the FOMC statement. The Fed's preferredmeasure of inflation rose 1.9% in the 12 months through January,just shy of its target.

Officials projected unemployment to finish this year at 4.5%,unchanged from the December forecast. That's a sign they expect toovershoot their estimate for maximum use of labor resources, whichthey put at 4.7%, down from 4.8% in December. Unemployment wasforecast to end 2018 and 2019 at 4.5%. The jobless rate was 4.7% inFebruary.

U.S. central bankers left unchanged their forecast for 2017 GDPgrowth at 2.1%. The median estimate showed the economy expanding2.1% in 2018 and 1.9% in 2019, compared to 2% and 1.9% in theDecember forecast.

The third rate hike since the 2007-2009 recession was welltelegraphed, following comments in recent weeks from officialsincluding Vice Chairman Stanley Fischer and New York Fed chiefWilliam Dudley, who called the case for a March move “a lot morecompelling.”

Investor and business confidence has soared since Trump won theU.S. presidency in November, buoyed by his vows to cut taxes, liftinfrastructure spending and ease regulations.

Still, economic data don't show an economy that's heating uprapidly. Retail sales in February grew at the slowest pace sinceAugust, a government report showed earlier Wednesday. The AtlantaFed's model for GDP predicts an expansion of 0.9% in the firstquarter, less than a third of the pace Trump is aiming for.

Yet some Fed officials have already upgraded their forecasts inanticipation of some form of boost to the economy from the newadministration.

Details, though, remain scant and must be passed by Congress,where his Republican Party controls both chambers and may includemembers wary of steps that lift the U.S. deficit.

Bloomberg News

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