Fed projects further gradual rate hikes
WASHINGTON — The Federal Reserve said Friday it expects low unemployment and rising inflation will keep it on track to raise interest rates at a gradual pace over the next two years. By late 2019, the Fed says its key policy rate should be at a level that will be slightly restrictive for growth.
The Fed's projection on rate hikes came with release of the central bank's semi-annual monetary report to Congress. Fed Chairman Jerome Powell is scheduled to testify on the report for two days next week.
The Fed last month raised its policy rate for a second time this year and projected two more hikes in 2018. The monetary report says the expectation is that further hikes will leave the rate slightly above its neutral level by late next year.
The Fed's current projection for the neutral rate — the point where monetary policy is not stimulating growth or restraining it — is 2.9 percent. With the June rate hike, the current range for the policy rate, known as the federal funds rate, is 1.75 percent to 2 percent. The policy report says that officials' median outlook for the future course of interest rates would put the policy rate “somewhat above” the neutral rate by the end of 2019 and through 2020.
The report noted that the median projection for the funds rate has it rising to 2.4 percent by the end of this year, which would indicate two more rate hikes are upcoming in 2018, and then climbing to 3.1 percent by the end of 2019 and 3.4 percent by the end of 2020.
That forecast would mean that the Fed's interest rates would cross a major milestone next year toward a point where Fed interest rates are no longer being kept low to boost growth and will begin to slightly restrain growth in a bid to make sure that low unemployment does not cause the economy to overheat and trigger rising inflation.
The Fed's interest rate has not been restrictive for over a decade. In response to the 2008 financial crisis, the Fed cut its policy rate to a record low near zero in December 2008 and kept it there for seven years. It boosted rates by a modest quarter-point in both 2015 and 2016 and then raised rates by three times last year as the economic recovery finally began to gain momentum.
Powell, who will testify Tuesday before the Senate Banking Committee and on Wednesday to the House Financial Services Committee, said in an interview this week that he believed “the economy's in a really good place” at the moment with unemployment at the lowest point in nearly two decades and inflation finally approaching the Fed's optimal goal of 2 percent annual increases.
Also Friday, stocks wrapped up another solid week as industrial and energy companies ticked higher, but corporate earnings got off to a sluggish start as reports from several major U.S. banks failed to excite investors.