Fed raising key interest rate
WASHINGTON — The U.S. Federal Reserve is raising its key interest rate and signalling confidence in the U.S. economy’s durability but plans to continue a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell.
The Fed said it expects to raise rates twice more this year. At the same time, it increased its estimate for rate hikes in 2019 from two to three, reflecting more optimistic expectations for growth and low unemployment.
In a statement ending its latest policy meeting, the Fed boosted its key short-term rate Wednesday by a modest quarter-point to a still-low range of 1.5 per cent to 1.75 per cent. It also said it will keep shrinking its bond portfolio. The two moves mean that many consumers and businesses will face higher loan rates over time.
Taken together, the Fed’s actions and forecasts Wednesday suggest a belief that the economy remains sturdy even nearly nine years after the Great Recession ended.
The Fed’s latest rate hike marks its sixth since it began tightening credit in December 2015, after having kept its benchmark rate at a record low near zero for seven years to help nurture the economy’s recovery from the recession. Wednesday’s action was approved 8-0, with the Fed avoiding any dissents at the first meeting Powell has presided over as chairman since succeeding Janet Yellen last month.
Bond yields rose and stocks held on to much of their gains after the Fed’s announcement, which was widely expected. But by the time stock trading had ended, the Dow Jones industrial average was down modestly, and the yield on the 10-year Treasury note, a benchmark for mortgages and other loans, was up only slightly to 2.88.
Some investors had speculated that Powell might move to impose his mark on the central bank by signalling a faster pace of rate hikes for 2018. But the new economic forecast, which includes a median projection for the path of future increases, made no change to the December projection for three hikes this year.
If the Fed does stick with its new forecast for three rate increases this year and three in 2019, its key policy rate would stand at 3.4 per cent after five years of credit tightening.
Wednesday’s forecast put the Fed long-term rate – the point at which its policies are neither boosting the economy nor holding it back – at 2.9 per cent.
At a news conference after the meeting, Powell said the Fed hasn’t lowered its forecasts for growth because of the Trump administration’s decision to impose tariffs on steel and aluminum imports. But he said the Fed’s regional bank presidents around the country have heard concerns from businesses about the consequences of the tariffs.
“Trade policy has become a concern going forward for that group,” the chairman said, referring to business leaders.