Fed holds rates steady and sees 'solid' economic gains

The Federal Reserve held short-term interest rates steady Wednesday and said it will continue along its path of gradual increases aimed at keeping the economy on track.

The rate-setting Federal Open Market Committee, in a statement released after its policy meeting, offered nothing to dispel market expectations that it will deliver its next rate increase in March.

Such a move would extend the central bank's pattern, since December 2016, of announcing steps to remove economic stimulus at every other meeting.

Fed officials are hoping to keep rates low enough to encourage inflation to firm up a bit without surging out of control, amid a tight labor market and solid economic growth.

The policy gathering was the last attended by Chairwoman Janet Yellen before she turns over the reins to her successor, Fed governor Jerome Powell. The Fed said Mr. Powell will begin his term as FOMC chairman on Saturday and is scheduled to be sworn in as chairman of the Fed board of governors on Monday.

Investors placed the probability of a rate increase at the March 20-21 meeting at around 78% before the policy statement was released, according to CME Group.

A bigger question looming over Wednesday's meeting centered on how officials' outlook on the economy had evolved since they met in December, when they raised their benchmark short-term rate to a still-low range between 1.25% and 1.5% and penciled in three increases for 2018. Officials voted unanimously Wednesday to leave the benchmark rate in that range.

The statement made few changes from December and affirmed a solid outlook for U.S. growth. It offered little sign that officials' thinking about the economy has changed materially.

"Gains in employment, household spending and business fixed investment have been solid, and the unemployment rate has stayed low," the FOMC said.

Since officials last met, President Donald Trump signed into law $1.5 trillion in tax cuts over the coming decade, boosting most private forecasts of growth in output and employment for the coming year.

Labor markets remain tight. The unemployment rate in December held at 4.1%, a 17-year low. The Labor Department will release Friday its January employment report.

Fed officials would like to see the jobless rate remain steady because they expect it has already fallen around a half-percentage point below the level they regard as sustainable over the long run. They want unemployment to stay at a level low enough to fuel more wage gains and nudge inflation up to their 2% target.

Consumer prices rose 1.7% in the year ended December, according to the Fed's preferred inflation gauge. So-called core prices, which exclude the volatile food and energy sectors, rose 1.5% last year. The recent decline in the U.S. dollar and upswing in oil prices should boost inflation in coming months.

The FOMC statement said officials expect inflation will move higher this year and stabilize around 2% over the medium term.

Also important to Fed officials, investors' expectations of future inflation rose in January. The 10-year inflation break-even rate, which reflects the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, has settled recently at its highest levels since last March, before the inflation soft patch hit.

The Fed's policy statement acknowledged the recent increase in market-based measures of inflation compensation but said that they still "remain low," repeating language from the December meeting statement.

Ms. Yellen, at her press conference in December, said officials' projections had largely incorporated the prospect that the tax cut will spur stronger growth. But this didn't result in any change to their expectations for the path of interest rates.

The Fed's policy statement repeated that officials see the near-term economic risks as "roughly balanced," meaning the prospects of growth that is either stronger than anticipated or weaker than anticipated are about the same. They have used that language for the past year.

Fed officials have raised short-term interest rates five times since late 2015, but financial conditions remain buoyant. Stocks have advanced to new records, suggesting it could become easier for companies to raise equity or borrow money. Yields on 10-year Treasury bonds have climbed in recent days to touch their highest levels in nearly four years, but remain very low by historical standards. The dollar has also moved lower, which should give a boost to economic growth by making U.S. exports cheaper in global markets.