Federal Reserve tells Congress further rate hikes on the way

The Federal Reserve said Friday it expects the U.S. economy will strengthen and warrant further gradual increases in its key interest rate.

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That rate forecast was included in the Fed's semi-annual monetary report to Congress, which Chair Janet Yellen will deliver to Congress next week. The Fed has raised interest rates three times since December, pushing its benchmark rate to a range of 1 percent to 1.25 percent. The Fed noted that policymakers still expect one more rate hike this year and another three hikes in 2018.

The Fed said this projected pace of hikes would still allow the labor market to keep strengthening and inflation to climb to the Fed's 2 percent target. The Fed also signaled that it expects to begin reducing its massive bond holdings this year.

The Fed's "Monetary Policy Report," presented twice a year, cited a number of reasons to be optimistic about the economy.

The report said while consumer spending, which accounts for 70 percent of economic activity, was sluggish at the start of 2017, it "appears to have rebounded recently supported by job gains, rising household wealth and favorable consumer sentiment." Likewise, business investment has accelerated, the Fed said after being weak for much of 2016, helped by a surge in spending on drilling and mining activity.

"The committee currently expects that the ongoing strength in the economy will warrant gradual increases in the federal funds rate," the report said, referring to the Fed's key policy rate.

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The government reported Friday that employers added a bigger-than-expected 222,000 jobs in June, the most in four months. Analysts predicted the size of the June gain would keep the Fed on track to raise rates again. Many say the next rate hike will likely occur in September, after which the Fed will begin trimming its bond holdings.

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