The U.S. economy has strengthened to the point where the Federal Reserve will likely raise its rates before year-end, but the increase may be less than what was initially thought due to a slowly recovering economy, according to results of this week's meeting of the Federal Open Markets Committee in Wash., D.C.
FOMC officials unanimously voted to leave the funds rate unchanged at zero during its regular two-day meeting that concluded Wednesday. But based on the Fed's own economic forecasts, the rate is likely to rise for the first time in 10 years some time before the end of 2015.
The FOMC continues to see the risks to the outlook for economic activity and the labor market as nearly balanced, the Fed said in a news release today. Inflation likely will remain near its recent low level in the near term, but the committee expects inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.
"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term," the news release said.
The FOMC is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities, and of rolling over maturing Treasury securities at auction, the Fed said. This policy should help maintain accommodative financial conditions by keeping the FOMC's holdings of longer-term securities at sizable levels.
"When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%," the release added.
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