WASHINGTON — The Federal Reserve is raising its key interest rate for the third time this year and foresees three additional hikes in 2018, a vote of confidence that the U.S. economy remains on solid footing 8 1/2 years after the end of the Great Recession.
The Fed said Wednesday that it’s lifting its short-term rate by a modest quarter-point to a still-low range of 1.25 percent to 1.5 percent. It is also continuing to slowly shrink its bond portfolio. Together, the two steps could lead over time to higher loan rates for consumers and businesses and slightly better returns for savers.
The central bank said in a statement after its latest policy meeting that it expects the job market and the economy to strengthen further. Partly as a result, it expects to keep raising rates at the same incremental pace next year under the leadership of Jerome Powell, who will succeed Janet Yellen as Fed chair in February.
Chris Probyn, chief economist at State Street Global Advisors, said he was surprised that Fed officials upgraded their forecast for economic growth next year and lowered their forecast for unemployment yet signaled no additional rate hikes.
“They’re saying, ‘We’re going to get more growth, we’re going to get lower unemployment, but we’re not going to respond to it with any more tightening,’ ” he said. “They are prepared to let the economy run a little hotter.”
Investors took Wednesday’s widely anticipated rate hike in stride, with the Dow Jones industrial average setting another record-high close.
Asked whether she was concerned that the Fed’s prolonged low rates might be fueling a stock bubble, Yellen said she thought the market’s gains had been supported by a sturdy U.S. and global economy. She said that if stock prices were to suddenly “adjust” downward, the economy and the financial system should be able to withstand it.
“When we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange,” Yellen said.
The Fed’s rate decision Wednesday was approved 7-2, with Charles Evans, president of the Fed’s Chicago regional bank, and Neel Kashkari, head of the Minneapolis Fed, voting no.
The central bank’s message Wednesday departed little from its recent statements. It still stresses that it expects to keep raising rates gradually. Its projections for future hikes, based on estimates of 16 officials, showed that the median expectation remains three rate hikes in 2018, at least two in 2019 and two more in 2020.
By then, the Fed’s target for short-term rates would have reached 3.1 percent — slightly above its estimate of a long-term neutral rate of 2.8 percent. That would mean the Fed would still be seeking to tighten credit three years from now.
At a news conference after the Fed’s meeting, Yellen said she would work to provide a smooth transition for Powell. Powell has been a Yellen ally who backed her cautious stance toward rate hikes in his five years on the Fed’s board. Yet no one knows for sure how his style of chairmanship or rate policy might depart from hers.
What’s more, Powell will be joined by several new Fed board members who, like him, are being chosen by President Donald Trump. Some analysts say they think that while Powell might not deviate much from Yellen’s rate policy, he and the new board members will adopt a looser approach to their regulation of the banking system.
On Wednesday, the Fed boosted its forecast for growth to 2.5 percent next year, up from a previous forecast of 2.1 percent. But it then foresees growth slowing to 2.1 percent in 2019 and 2 percent in 2020. Those rates are far below the 3 to 4 percent growth that the Trump administration insists would result from its economic policies of tax cuts, deregulation and stricter enforcement of trade laws against unfair foreign imports.