WASHINGTON — The Federal Reserve achieved an inflation milestone this week, but that isn't likely to alter expectations for what the Fed will announce when its latest policy meeting ends Wednesday.
After six years of mostly missing its annual 2 percent target for inflation, the Fed learned Monday that its preferred gauge of consumer inflation had reached a year-over-year pace of 2 percent. And in the coming months, inflation is widely expected to stay around that level.
The debate the Fed is now likely to have is whether it should accept a period in which inflation rises above 2 percent without accelerating its pace of rate increases. But for now, a rate increase is considered unlikely. In a statement it will issue Wednesday afternoon, the Fed is expected to leave its benchmark rate unchanged at a still-low level of 1.5 percent to 1.75 percent.
Solid economic growth, low unemployment and evidence of inflation pressures, though, are expected to keep the central bank on a path of gradual rate hikes the rest of the year. Most Fed watchers foresee either two or three additional increases in the Fed's key rate by year's end, coming after an earlier hike in January.
The central bank is meeting as its board is undergoing a makeover, with a raft of new appointees by President Donald Trump who appear generally supportive of the Fed's cautious approach to rates since the Great Recession ended.
Despite Trump's complaints during the presidential race that the Fed was aiding Democrats in keeping rates ultra-low under President Barack Obama, his choices for a chairman and for other slots on the Fed's board have been moderates rather than hard-core conservatives who would favor a faster tightening of credit.
"The Trump Fed could have been a much more hawkish Fed but so far, these choices are pretty middle-of-the road," said Diane Swonk, chief economist at Grant Thornton in Chicago.
As Jerome Powell, Trump's hand-picked new Fed chairman, said at a news conference after the central bank's most recent meeting in March, "We're trying to take the middle ground, and the committee continues to believe that the middle ground consists of further gradual increases in the federal-funds rate."
Bond investors are signaling that they expect a pickup in U.S. inflation, having bid up the yield on the 10-year Treasury note last week above 3 percent before the yield settled just below that by week's end. A year ago, the 10-year yield was just 2.3 percent.
Under Powell's predecessors, Janet Yellen and Ben Bernanke, the Fed's board endured criticism from House Republicans over its decision to pursue a bond purchase program designed to lower long-term borrowing rates and to leave its key rate at a record low near zero for seven years. The critics charged that those policies would eventually produce destructive bubbles in the prices of stocks and other assets and, eventually, undesirably high inflation.
But so far, Trump's reshaping of the Fed's board reflects a generally status quo approach.
"Trump's criticisms during the campaign have not been borne out by his decisions on who to put on the Fed," said Mark Zandi, chief economist at Moody's Analytics.
Since the Fed began raising rates in December 2015, the pace has been modest and gradual: One quarter-point rate increase in 2015, one in 2016, three in 2017 and one so far this year.
When the Fed announced its most recent rate hike in March, it forecast that it would raise rates twice more this year. But some economists think that the Fed will respond to the increased government stimulus in the form of tax cuts and higher spending to accelerate the rate hikes slightly from three to four this year.
Congress in December passed a $1.5 trillion tax cut that took effect in January. And then in February, it approved $300 billion more in government spending for this year and next year. That stimulus, coming at a time when unemployment is at a 17-year low of 4.1 percent, could raise the threat of higher inflation.
Yet even against this backdrop, the prevailing view is that the Trump-shaped Fed will remain cautious about rate increases.
"The central bank does not want to make the mistakes made in the past when the Fed raised rates too high, too fast and became the No. 1 cause of a recession," said Sung Won Sohn, an economics professor at California State University, Channel Islands.