Fed increases interest rates, says more coming
WASHINGTON — The Federal Reserve raised interest rates a quarter-point Wednesday, as officials indicated the central bank is highly likely to hike rates again in December and three more times next year, bucking President Donald Trump’s request to hold off.
The Fed stressed repeatedly that the U.S. economy is “strong” across the board and no longer needs the heavy stimulus the central bank put into place during the Great Recession.
The hike increases the federal funds rate from a range of 1.75 percent to 2 percent to a range of 2 percent to 2.25 percent, the highest level in a decade and likely to be felt by Americans who have a lot of debt or are seeking a bank loan.
After the Fed boosts the federal funds rate, interest rates on credit cards, mortgages and small business loans typically rise, as well.
The Fed also increased its growth projections for this year and next, an indication that it sees little sign that the trade war, rising oil prices or political turmoil will derail the economy.
“Our economy is strong, and growth is running at a healthy clip,” Fed Chair Jerome Powell said during a news conference Wednesday after the release of the statement. “Inflation is low and stable. All of these are very good signs.”
Powell said that businesses are expressing concerns about the trade war causing them to change their supply chains and hold off on investments, but he emphasized that it isn’t showing up in the data yet. His main worry is that Trump’s trade battle with China and other nations could result in more, not fewer, trade barriers.
“Where is this going? If the end place we get to is lower tariffs, that would be good,” Powell said. “If this goes to a thing where we have widespread tariffs that remain in place for a long time, that’s going to be bad for the U.S. economy and American workers.”
The U.S. economy is expected to grow 3.1 percent this year, the Fed said, which would be the first time the economy topped the 3 percent mark for annual growth in more than a decade. Trump’s goal is to have growth hit that level and stay there for years.
The Fed, however, anticipates growth will fall back to 2.5 percent in 2019, 2 percent in 2020 and 1.8 percent in 2021.
“The odds are rising that the Fed can pull off a soft landing for the economy,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics.
In a telling signal, the Fed deleted the line from its statement that said monetary policy will “remain accommodative,” an indication the Fed believes
it’s getting closer to the so-called neutral level of interest rates where policy doesn’t help or hurt the economy.
Powell downplayed the significance of the move. In the press conference, he said that policy is still slightly stimulative and that the latest rate hike was not an attempt to “cool the economy.”
Stocks retreated slightly as he spoke and are currently flat for the day.
Twelve of the Fed’s 16 leaders now anticipate another rate hike by the end of the year.
“Consumers should bank on rates for consumer loans rising an additional full percentage point starting in December of this year,” said Robert Frick, an economist at Navy Federal Credit Union.
Trump has urged Powell, his own appointee, to not raise rates further, but the central bank is an independent agency that shows no sign of bowing to presidential pressure.
Fed leaders now project that the neutral level for interest rates is 3 percent, a level they are likely to hit within the next year. If they go beyond that, business leaders are likely to read that as a sign the Fed is concerned that the economy is overheating and inflation is picking up too much and the central bank wants to rein that in.
The Fed doesn’t foresee interest rates going much above 3.25 percent to 3.5 percent in the coming years, although central bankers stress they will adjust policy depending upon what happens with the economy.
For now, the Fed is projecting a rosy time for the U.S. economy. In forecasts released Wednesday, the central bank’s leaders predicted that unemployment would fall to 3.7 percent this year and 3.5 percent next year and that inflation will remain modest at 2.1 percent this year and 2 percent next year.