Fed lifts rates, boosts forecast to four hikes this year
WASHINGTON – The economy is revving up and so the Federal Reserve is stepping up its plan to move interest rates closer to normal.
As anticipated, the Fed raised its benchmark short-term interest rate Wednesday but it also upgraded its forecast from a total of three increases this year to four amid an improving economy, falling unemployment and slightly stronger inflation.
The move is expected to cascade through the economy, in particular nudging up rates for variable-rate consumer loans such as credit cards and adjustable-rate mortgages.
It’s also likely to push up bank savings rates for Americans, especially seniors, who are finally realizing higher returns on CDs, bonds and other fixed-income assets after years of meager yields.
“The main takeaway is the economy is doing very well,” Fed Chairman Jerome Powell said at a news conference. “Most people who want to find jobs are finding them.”
The central bank lifted its federal fund rate – what banks charge each other for overnight loans – by a quarter percentage point to a range of 1.75 to 2 percent. That’s within shouting distance of its longer-run forecast of 2.9 percent. It’s the second rate increase this year and the seventh since the Fed began bumping up rates amid an improving economy in late 2015.
For years after the Great Recession of 2007-09, the Fed kept its key rate near zero to stimulate growth.
In perhaps a telling sign, the Fed removed its previous assertion that its key rate “is likely to remain, for some time, below levels that are expected to prevail in the longer run.” That suggests the Fed could push up rates more rapidly. Powell, however, said it simply means rates are getting closer to normal levels.
How fast rates will rise
The big question ahead of Wednesday’s meeting was whether the Fed
would keep its forecast for three quarter-point increases this year or bump it up to four. It raised it to four but maintained its projection of three more increases in 2019.
The Fed expects its key rate to rise to 2.4 percent at the end of the year, up from its previous estimate of 2.1 percent, reckoning unemployment will fall a bit faster than it previously thought and inflation will kick up a bit more, according to its median forecast. Eight of 15 officials now expect four increases, up from seven in March and that one addition to the four-increase camp was enough to move up the median.
It now expects the rate will be 3.1 percent at the end of 2019, up from its previous projection of 2.9 percent.
The Fed predicts the economy will grow 2.8 percent this year, up from its March forecast of 2.7 percent, and it maintained its 2.4 percent estimate for 2019.
“Economic activity has been rising and a solid rate,” the Fed said in a statement after a two-day meeting. The economy grew at a 2.2 percent annual rate in the first quarter, in line with its modest average throughout the nine-year-old economic expansion. But growth is expected to pick up to about 4 percent in the current quarter and average close to 3 percent this year.
While the federal tax cuts and spending increases are goosing the economy, the Trump administration’s widening trade standoffs with other nations could slow growth by next year if proposed tariffs and titfor-tat responses are carried through, economists say.
The Fed estimates the 3.8 percent unemployment rate will fall to 3.6 percent by the end of the year and 3.5 percent by the end of 2019, below its March forecast of 3.6 percent. “Job gains have been strong, on average, in recent months, and the unemployment rate has declined,” the statement said.
Employers have added a solid average of 179,000 jobs a month since the Fed last met in mid-March and unemployment has fallen to an 18-year low of 3.8 percent. That could spur faster wage gains and inflation as business compete more intensely for fewer available workers.