Fed raises key rate, sig­nals more of same

Baltimore Sun - - MARYLAND - By Martin Crutsinger

WASH­ING­TON — 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 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 reach­ing the Fed’s 2 per­cent tar­get level.

Economists said the Fed left lit­tle doubt that it’s pre­pared to in­crease the pace of its credit tight­en­ing to guard against high in­fla­tion later on.

“The la­bor mar­ket is get­ting tighter, and price pres­sures are pick­ing up,” said Greg McBride, chief f i nan­cial an­a­lyst at Bankrate.com. “The Fed is pre­pared to be quicker about push­ing rates higher.”

It was the Fed’s sev­enth rate in­crease since 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. Fed Chair­man Jerome Pow­ell sought to por­tray the Fed’s ac­tions as ev­i­dence mainly that the econ­omy is do­ing well.

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’s new pro­jec­tion for the pace of rate hikes shows four this year, three in 2019 and one in 2020.

At a news con­fer­ence, Pow­ell sought to por­tray the Fed’s ac­tions as ev­i­dence mainly that the econ­omy is do­ing well and not that the cen­tral bank is ea­ger to ac­cel­er­ate its rate in­creases.

“The econ­omy is in great shape,” Pow­ell said.

He ac­knowl­edged that the Fed is hear­ing con­cerns from some busi­ness ex­ec­u­tives about the Trump ad­min­is­tra­tion’s com­bat­ive trade poli­cies, in­clud­ing anec­do­tal cases in which com­pa­nies have post­poned hir­ing or ma­jor pur­chases.

But Pow­ell added, “For now, we don’t see that in the num­bers at all.”

Trump has slapped tar­iffs on steel and alu­minum im­ports, has threat­ened ad­di­tional tar­iffs on Chi­nese im­ports and has di­rected his ad­min­is­tra­tion to con­sider fur­ther du­ties on im­ported cars. Those moves have in­flated steel and alu­minum costs.

Pow­ell ap­peared at ease Wed­nes­day in field­ing ques­tions rang­ing from the in­tri­ca­cies of mon­e­tary pol­icy to bank­ing reg­u­la­tion and even to whether mar­i­juana should be le­gal­ized. (He said that as Fed chair­man, he had no po­si­tion on that.) And he an­nounced that in the in­ter­est of pub­lic trans­parency, he will be­gin next year to hold a news con­fer­ence af­ter each of the Fed’s eight pol­icy meet­ings each year, rather than only once a quar­ter.

“This does not sig­nal any­thing about the fu­ture pace of in­ter­est rates hikes,” the chair­man cau­tioned.

Since the Fed be­gan hold­ing quar­terly news con­fer­ences in 2011, it has an­nounced ma­jor pol­icy moves only at the quar­terly meet­ings, which have been fol­lowed by a news con­fer­ence by leader of the Fed.

The cen­tral bank’s new me­dian fore­cast projects the Fed’s 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 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.


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