The Federal Reserve said it would raise short-term interest rates and spelled out in greater detail its plans to start slowly shrinking its $4.5 trillion portfolio of bonds and other assets this year.
The moves on Wednesday mark the latest test of the economy's ability to stand on its own as the central bank dials back the extraordinary stimulus measures it unleashed through successive bursts of bond purchases to boost household and business spending after the 2008 financial crisis.
Fed officials said they would increase their benchmark federal-funds rate on Thursday by a quarter percentage point to a range between 1% and 1.25% and penciled in one more increase later this year if the economy performs in line with their forecast.
Officials also revealed plans for winding down their holdings of Treasury and mortgage securities. Fed Chairwoman Janet Yellen said if the economy performed in line with the central bank's forecasts, it could set those plans into motion "relatively soon."
The Fed stopped adding to its holdings, also known as its balance sheet, more than three years ago, but it has been reinvesting the proceeds of maturing assets to keep those holdings steady.
The Fed's plan would start reducing the holdings by allowing a small amount of net maturities a month -- $6 billion in Treasury securities and $4 billion in mortgage bonds -- and to allow that amount to rise each quarter, essentially setting a speed limit for any wind-down. Those limits would ultimately rise to a maximum of $30 billion a month for Treasurys and $20 billion a month for mortgage securities.
"The plan is one that is conscientiously intended to avoid creating market strains and to allow the market to adjust to a very gradual and predictable plan," Ms. Yellen said at a news conference on Wednesday.
The reinvestments have helped to hold down long-term interest rates and letting them roll off without reinvestment could push up long-term rates. The Fed has been buying around $24 billion in mortgage securities a month this year and around $17.5 billion in Treasurys, according to FTN Financial.
Together with the decision to raise interest rates, the moves signal officials believe the economy will keep growing and the job market will stay healthy as the central bank withdraws support.
"The economy is doing very well, is showing resilience," Ms. Yellen said.
Since officials last met in early May, they have faced conflicting signals about the economy on two items that matter most: employment and inflation. Solid job gains have pulled down the unemployment rate to lower-than-expected levels, at 4.3% in May, but inflation has unexpectedly slowed.
Ms. Yellen said officials are "monitoring inflation developments closely, " but also warned against reading too much into a handful of recent one-off declines in consumer prices, such as wireless phone plans, that have weighed on inflation gauges.
"It's important not to overreact to a few readings and data on inflation can be noisy," she said, particularly given tight labor markets.
Fed officials marked down their projections for inflation this year, though they still see annual price gains reaching their 2% target by the end of 2018. They now expect prices excluding food and energy to rise 1.7% this year, from a projection of 1.9% in March.
Officials also dropped their unemployment-rate forecast to 4.3% for the end of 2017 and to 4.2% at the end of 2018 and 2019, compared with their March projection of 4.5% for each year. Officials see the unemployment rate over the long run rising to 4.6%, down from 4.7% in the March projection.
Officials' median expectation for the federal-funds rate showed few changes from projections released in March. The projections put short-term rates between 2% and 2.25% at the end of 2018, implying three more quarter-point increases next year, and between 2.75% and 3% at the end of 2019, implying three additional quarter-point increases.
The central bank had held short-term rates steady since March, when it raised them by a quarter point to a range between 0.75% and 1%, the third increase since June 2006. The Fed held rates at near zero from the end of 2008 through most of 2015, before lifting the benchmark rate once in late 2015 and once in late 2016.
Wednesday's rate increase had been largely anticipated by investors and analysts, but expectations for how the Fed's plans later this year will unfold aren't clear.
Minneapolis Fed President Neel Kashkari cast a dissenting vote Wednesday because he wanted to hold rates steady.
In recent years, officials faced a recurring predicament in which they signaled a desire to tighten policy only to hold off after the economy underperformed or faced risks from abroad. That hasn't happened so far this year, and in fact financial conditions have eased, with stocks rising to new highs and bond yields drifting lower. Consumer and business confidence surveys have remained buoyant.
But the inflation softness has made markets skeptical that the Fed will be able to commit to the rate path it has sketched out. When officials raised rates in March, the Fed's preferred inflation measure, released by the Commerce Department, showed prices excluding food and energy had risen 1.8% over the year ended February, matching the strongest reading in nearly five years.
Since then, inflation has ticked lower, due in part to an idiosyncratic decline in wireless phone plans. Core inflation, according to the Fed's preferred gauge, rose 1.5% over the year ended April.
A separate measure of inflation released Wednesday by the Labor Department showed price pressures remained muted in May, with more broad-based softness in categories that include used cars and apparel. As a result, economists at J.P. Morgan Chase & Co. expect core prices measured by the Fed's preferred inflation to show an annual gain of less than 1.4% in May.
Just how inflation unfolds in the months ahead could determine how policy makers sequence another rate increase and the start of the balance-sheet plan. Officials will want to see several more months of inflation readings before they significantly change their plans.
U.S. government bond prices rallied Wednesday after the inflation report from the Labor Department, sending the yield on the benchmark 10-year Treasury note to a fresh 2017 low. Yields fall as bond prices rise.
Employers have added an average 121,000 jobs over the three months ended May, a slightly slower pace than in recent periods but still ahead of the levels officials believe is needed to keep up with growth of the population and labor force. Since officials raised rates in March, the unemployment rate has dropped to 4.3% from 4.7%.
Write to Nick Timiraos at firstname.lastname@example.org
(END) Dow Jones Newswires
June 14, 2017 16:39 ET (20:39 GMT)