Fed raises key rate and sees possible acceleration in hikes
The Federal Reserve took note of a resilient U.S. economy Wednesday by raising its benchmark interest rate for the second time this year and signaling that it may step up its pace of rate increases.
The Fed now foresees four rate hikes this year, up from the three it had previously forecast. The action means consumers and businesses will face higher loan rates over time.
The central bank raised its key short-term rate by a modest quarter-point to a still-low range of 1.75 percent to 2 percent. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market’s strength and inflation that’s finally nearing the Fed’s target level.
Economists said the Fed left little doubt that it’s prepared to increase the pace of its credit tightening.
“The labor market is getting tighter, and price pressures are picking up,” said Greg McBride, chief financial analyst at Bankrate.com. “The Fed is prepared to be quicker about pushing rates higher.”
It was the Fed’s seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.
The announcement helped resolved a debate in financial markets over whether the Fed under Jerome Powell, who succeeded Janet Yellen as chairman in February, might see a need to signal a possible acceleration in rate hikes. The statement the Fed issued Wednesday after its latest policy meeting ended suggested that he does.
Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period. The Fed had previously said its key rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
The Fed’s new projection for the pace of rate hikes shows four rate this year and three in 2019 — both unchanged from its previous forecast in March — and one in 2020, down from the two that had been projected previously.
The new median forecast projects the benchmark rate at 3.1 percent by the end of 2019, up from 2.9 percent in the previous forecast. For 2020, the Fed foresees a median rate of 3.4 percent. That means that by then, it thinks its key rate will finally exceed the 2.9 percent it sees as neutral — as neither stimulating nor restraining growth. Should the Fed’s expectations prove accurate, its policy would then be intended to slow the economy.
In its updated forecasts, the Fed envisions stronger growth this year — 2.8 percent, up from the 2.7 percent it predicted in March. Unemployment, now at an 18-year low of 3.8 percent, would drop to 3.6 percent by year’s end and to 3.5 percent in 2019 and 2020 — levels not seen in 49 years. Inflation by the Fed’s preferred gauge would hit its target of 2 percent this year and edge up to 2.1 percent over the next two years.
A gradual rise in inflation is coinciding with newfound economic strength. After years in which the economy expanded at roughly a tepid 2 percent annually, growth could top 3 percent this year. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress late last year.
With employers hiring at a solid pace month after month, unemployment has reached 3.8 percent. Not since 1969 has the jobless rate been lower.
An Arab military coalition invaded Yemen’s main Red Sea port Wednesday, threatening to worsen what is already the world’s most severe humanitarian disaster by disrupting the pipeline that millions of Yemenis rely on for food and other supplies.
The air and ground attack by forces loyal to Saudi Arabia and the United Arab Emirates and backed by the United States was aimed at tipping the balance in Yemen’s long-running civil war and driving Iranian-backed rebels out of the port of Hodeida. But sustained fighting there could produce one of the bloodiest urban battles of the war, deepening what is already a catastrophic humanitarian situation.
After years of war, 8 million of Yemen’s estimated 28 million people are at risk of starvation, according to the United Nations and aid agencies. About a quarter of a million people in Hodeida, a city of 600,000, are in danger of injury or death in an urban assault, they said.
But a battle there would have consequences far beyond the city, whose port is the main entry point for aid to the rest of the country.
“This attack risks more people dying, but it also risks cutting the lifeline of millions of Yemenis,” said Jolien Veldwijk, the acting country director in Yemen for the aid agency Care International. “Food imports already reached the lowest levels since the conflict started and the price of basic commodities has risen by a third. We are gravely concerned that parts of the population could experience famine.”
The Saudis and Emiratis intervened in the war three years ago with hopes of a quick victory over the Houthi rebels, an armed movement with ties to Iran. Instead, the two nations have been stuck in a quagmire.
With the assault on Hodeida, they were hoping for a symbolic victory over the group that would give the neighboring countries an upper hand in peace negotiations.
The Houthis still control the capital, Sanaa, as well as territories in northern Yemen, their ancestral lands.
“The liberation of the city and port will create a new reality and bring the Houthis to the negotiations,” Anwar Gargash, the Emirates’ state minister for foreign affairs, said on Twitter on Wednesday.
The United States has backed the Saudi-led coalition in this war but U.S. military officials, including Defense Secretary Jim Mattis, have warned their Arab allies that the assault could end in failure both militarily and politically, and result in further civilian suffering.
An increasing number of Republican and Democratic lawmakers in Congress are criticizing the U.S. role, accusing the Pentagon of being complicit in the bombing campaign.
Nine Senate Republicans and Democrats wrote to Mattis and Secretary of State Mike Pompeo on Tuesday, expressing “grave alarm” that the offensive would worsen the humanitarian crisis in the country.
“The U.S. must now withdraw all its military support of the Saudi and UAE military coalition,” Rep. Ted Lieu, D-Calif., a former Air Force lawyer, said in a separate email Wednesday. “The U.S. already has blood on its hands in the Yemen crisis, we should not make them even bloodier.”
Yemeni troops, trained and financed by the United Arab Emirates, led the ground offensive Wednesday, which began around daybreak on the southern edge of the city. There were also airstrikes on two proHouthi neighborhoods in the same area, according to residents.
The Emiratis have signaled that they are planning to launch a separate naval offensive to take the port.
Aid workers who have remained in Hodeida said the center of the city remained mostly quiet.
Two diplomats familiar with the situation said that the Saudi-Emirati coalition aimed to seize the port facilities, but by late afternoon that planned assault did not appear to have started.
The United Nations, which had been frantically trying to unload two shiploads of food aid before the hostilities broke out, was setting up distribution hubs of emergency relief and food packets in the event of large civilian evacuations from the city.
The Hodeida operation began while Washington’s attention was still focused on the summit meeting between President Donald Trump and North Korean leader Kim Jong Un. It was not immediately clear what role, if any, U.S. military advisers would play in the campaign. The New York Times reported last month that U.S. Army commandos were helping to locate and destroy caches of ballistic missiles and launch sites that Houthi rebels were using to attack Saudi cities.
Since 2015, the United States has provided the Saudi-led air campaign in Yemen with air-to-air refueling, intelligence assessments and other military advice, but even those roles have been contentious.