What is Fed's economic strategy?
WASHINGTON — When last we left the top officials of the Federal Reserve, they had just raised interest rates, signaled two more increases were on their way this year and given a general vote of confidence to the state of the U.S. economy. Since then, the Fed chairman, Jerome Powell, has fielded a barrage of questions from members of Congress about slow wage growth and the gathering storm clouds of a trade war. President Donald Trump has broken recent protocol and publicly criticized the Fed’s path of rate increases, worrying that they will dampen a strong economic run. Economic growth clocked in above 4 percent for the second quarter, and inflation continued to run slightly above the Fed’s target level of 2 percent. On Wednesday, the Fed issued a statement leaving interest rates unchanged but said the U.S. economy is “strong” and signaled that more rate hikes are coming. Here are some things to know: Is the hot economy stoking inflation fears?
Powell has consistently played down the notion that the economy is close to “overheating” — growing so fast, with unemployment so low, that it sets off a rapid escalation in wages and consumer prices. The economy’s 4.1 percent growth in the second quarter certainly is rapid, but its current pace for the year, about 3 percent growth, is only slightly above the Fed’s most recent forecasts.
Is trade a risk to growth yet?
As Powell noted in his testimony before Congress last month, the Fed has heard a lot anecdotally from businesses about fears of U.S. tariffs hurting investment and growth — but those fears have not shown up in the economic data. That is partly because a pre-tariff surge in soybean exports helped prop up growth in the second quarter, a trend that economists warn will reverse in the back half of the year.
“The escalating trade rhetoric hampers forecasters’ near-term view of the economy, which is a particular problem for the Fed currently as it attempts to engineer a soft landing from the current expansion,” Deutsche Bank researchers wrote this week.
Can the president influence the Fed?
Trump has made no secret of his disagreement with the Fed’s rate increases, tweeting twice last month that the central bank’s moves undercut the U.S. economy and “hurts all that we have done.”
The president, who had accused the Fed of keeping interest rates artificially low to help President Barack Obama, now appears ready to blame the central bank for trying to slow down a booming economy.
Powell has insisted the Fed is an independent body that moves in response to economic data, not political pressure.
Officials Wednesday didn’t hint of slowing or pausing the pace of rate increases. Such a move should be in response to actual pressures from inflation, wages or trade uncertainty. Any suggestion of a slowdown could have been viewed as bending to political pressure.
What’s the Fed’s next move?
The Fed’s statement was upbeat on the economy, pointing to a strengthening labor market, economic activity
growing at “a strong rate,” and inflation that’s reached the central bank’s target of 2 percent annual gains.
Analysts saw all the comments about economic strength as a clear signal that the Fed remains on track to raise rates two more times this year.
There was no mention in the statement of what many economists see as one of the biggest risks at the moment: rising tariffs on billions of dollars of U.S. exports and imports that have been imposed as a result of Trump’s new gettough approach on trade.
What it means for you
The benchmark interest rate is tied to consumer debt, particularly home equity lines of credit, credit cards, and other adjustable-rate instruments. that use adjustable rates.
Keeping the rate unchanged for now means good news short-term for consumers seeking to borrow money, whether its for a mortgage, a car loan, or using credit cards.
“All signs still point to a September
rate hike,” said Greg McBride, chief financial analyst at Bankrate.com. He
said consumers should continue to pay down their home equity, credit card and other loans with variable rates that will rise further as the Fed keeps hiking rates.
“Refinance adjustable rate debt into fixed rates to insulate yourself from further rate hikes,” McBride recommended.