Fed Chair Janet Yellen is focused more on economic growth than she is inflation weakness, leading her to believe the central bank will keep raising interest rates.
The central bank head addressed perhaps the most vexing issue facing issue facing policymakers, mainly that Fed policies have yet to achieve the 2 percent inflation target its programs were supposed to generate.
Federal Open Market Committee members have reduced their forecast for headline inflation this year to 1.6 percent, according to projections released Wednesday.
That’s well below the 2 percent Fed target, a shortfall that has not prevented officials from tightening monetary policy this year. The committee approved its second quarter-point hike this year in its benchmark interest rate target.
Yellen indicated she’s not terribly concerned about the weakening inflation trend.
“Our decision to make another gradual reduction in the amount of policy accommodation reflects the progress the economy has made and is expected to make toward maximum employment and price stability assigned to us by law,” the chair said during her post-FOMC meeting news conference.
Indeed, the committee nudge up its full-year GDP forecast from 2.1 percent in March to 2.2 percent now even as it cut the inflation outlook.
Yellen said the weakness in inflation likely is driven by factors that won’t persist.
“The recent lower reading on inflation have been driven significantly by what appears to be one-off reductions in certain categories of prices such as wireless telephone services and prescriptions drugs,” she said.
In addition to the rate hikes, the Fed said that later this year it will begin reducing the holdings in its $4.5 trillion balance sheet bond portfolio.