Federal Reserve officials expect to raise interest rates more slowly than they had previously predicted, with a growing number favoring only a single increase this year in the Fed’s benchmark rate.
As expected, the Fed on Wednesday announced no changes in its stimulus campaign following a meeting of its policymaking committee. But economic forecasts the Fed published separately showed that officials were once again leaning toward keeping interest rates lower longer.
Many analysts had been expecting a rate increase in September and possibly more before the end of the year. But that scenario seems less likely now.
Investors seemed reassured by that shift, and stock indexes ended the trading day on an up note.
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The Dow Jones industrial average rose 31.26, or 0.17 percent, to 17,935.74. The Standard & Poor’s 500 index rose 4.15, or 0.20 percent, to 2,100.44. The Nasdaq composite rose 9.33, or 0.18 percent, to 5,064.88.
“This makes the market feel more confident,” said Alan Rechtschaffen, financial advisor at UBS Wealth Management Americas.
Fed chair Janet Yellen told reporters after a two-day policy meeting that the central bank needed to see more gains in employment and stronger signs of inflation before raising rates. She didn’t provide a timetable for an increase, but most economists expect the Fed to move later this year.
Fed officials reduced their forecasts for growth this year to between 1.8 percent and 2 percent. Just a few months ago, in March, they had predicted growth between 2.3 percent and 2.7 percent.
Almost all 17 Fed officials on the Federal Open Market Committee still expect to start raising interest rates later this year, but seven of those officials now expect a single increase, up from three officials in March. Officials also predicted they would raise rates more slowly in subsequent years.
The Fed said in its statement that the economy has resumed a moderate pace of expansion after another disappointing winter.
“The pace of job gains picked up while the unemployment rate remained steady,” it said. “On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished somewhat.”
Fed officials retained a more upbeat view about coming years, at least for the time being, predicting growth of up to 2.7 percent in 2016 and up to 2.5 percent in 2017.
This year, however, officials predicted the unemployment rate would fall more slowly, ending the year between 5.2 percent and 5.3 percent rather than the March range of 5 percent to 5.2 percent. That is a significant change because it means officials now expect that rate to end the year at or above its estimated long-term equilibrium rate of 5 percent to 5.2 percent.
Officials made little change in the inflation forecasts, predicting prices would rise no more than 0.8 percent this year and 1.9 percent next year. They continued to predict inflation might reach the Fed’s 2 percent annual target in 2017.
The economy shrank at an annual rate of 0.7 percent in the first quarter, and forecasters have reduced their expectations for the rest of the year. Macroeconomic Advisers, a leading firm, estimates the economy is growing at a rate of 2.5 percent in the second quarter, which runs through the end of the month.
Job growth, however, has remained relatively strong. The economy added a monthly average of 217,000 jobs during the first five months of the year.
A small group of Fed officials already has concluded a rate increase this year would be premature. They point to the sluggish pace of inflation as evidence the time has not yet come to cut back the Fed’s stimulus campaign. The Fed’s preferred measure of prices rose just 1.2 percent in the 12 months ending in April, and it has remained below the Fed’s 2 percent target for three straight years.
But the majority of Fed officials who want to start raising rates later this year argue that recent growth is strong enough to justify an expectation that inflation will rebound toward 2 percent over the next few years. By raising rates more slowly than in past periods of tightening, they say, the Fed would still be stimulating the economy — just a little less than before.
The Fed’s move toward the exit contrasts with the major central banks in Europe and Asia, which remain deeply immersed in efforts to revive their economies. For the United States, the weakness of the global economy has weighed on growth, driving up the value of the dollar and limiting demand for American exports. Since higher interest rates would tend to further strengthen the dollar, that is another reason the Fed may temper the pace of its rate increases.