CITING STRONG JOB MARKET, FED VOTES TO BOOST RATES
Some skeptical of inflation claims
The Federal Reserve raised interest rates for the third time in six months, a sign that it expects continued growth, even in the face of some recent poor economic data.
“Near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely,” the Federal Open Market Committee said in a statement. “The labor market has continued to strengthen and ... economic activity has been rising moderately so far this year,”
The government reported yesterday that the Consumer Price Index, which is one measure of inflation, fell 0.1 percent in May from the month before. The Fed has long had a 2 percent annual target, but inflation has been much lower. Still, the central bank had signaled to Wall Street it would raise interest rates yesterday, and seemed to have painted itself in a corner.
The Fed said that while inflation has been low, it is expected to soon hit the 2 percent target.
“Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term, but to stabilize around the committee’s 2 percent objective over the medium term,” the FOMC said in its statement.
But some economists are skeptical that will happen.
“Core CPI has been declining for the past four months,” said Ozlem Yaylaci, an economist with IHS Markit. “They are expecting 2 percent, which may not be realistic.”
The Fed voted yesterday to raise the federal funds rate — the rate at which banks make overnight loans to other banks — by 25 basis points, from 1 percent to 1.25 percent. Hiking interest rates is a tool that policy makers use to keep the economy from overheating or to dampen a bubble. Higher rates make it more expensive for companies and consumers to borrow money, affecting everything from loans to credit card rates to home mortgages.
The Fed has a mandate to keep the country at full employment and make sure inflation does not rise or fall too much. The unemployment rate is now at 4.3 percent, at — or even below — the level long considered to be full employment. U.S. employers continue to add jobs at a steady rate.
“The U.S. is good. More important, we see the international markets finally beginning a six- to eight-year turn,” said Christine Armstrong, executive director at Morgan Stanley in Boston. “Growth is really good, we don’t see any kind of slowdowns.”
Also yesterday, Fed Chair Janet Yellen declined to say whether she would stay on for a second term if asked by President Trump. Yellen’s term as chair ends in February 2018, and Trump has not said if he would ask her to stay on. Before becoming president, he often criticized both the Fed and Yellen. — jordan.graham@bostonherald.com