Fed raises rates for 3rd time this year with 1 more expected
WASHINGTON » The Federal Reserve signaled its confidence Wednesday in the U.S. economy by raising a key interest rate for a third time this year, forecasting another rate hike before year’s end and predicting that it will continue to tighten credit into 2020 to manage growth and inflation.
The Fed lifted its short-term rate — a benchmark for many consumer and business loans — by a modest quarter-point to a range of 2 percent to 2.25 percent. It was its eighth hike since late 2015. The central bank also stuck with a previous forecast for three more rate hikes in 2019.
In a statement after its latest policy meeting, the Fed dropped phrasing it had long used that characterized its policy as “accommodative” — that is, favoring low rates. The Fed had used variations of that pledge in the seven years that it kept its key rate at a record low near zero and over the past nearly three years in which it’s gradually tightened credit.
By removing that language, the Fed may be signaling its resolve to keep raising rates. In a news conference after its meeting, though, Chairman Jerome Powell said the removal of the “accommodative” language did not amount to a policy change.
“Our economy is strong,” Powell declared at the start of his news conference. “Growth is running at a healthy clip, unemployment is low. The number of people working is rising steadily, and wages are up. Inflation is low and stable, all of these are very good signs.”
The chairman added, though: “That’s not to say everything is perfect. The benefits of this strong economy have not reached all Americans. Many of our country’s economic challenges are beyond the scope of the Fed.”
The Fed’s actions and its updated economic forecasts Wednesday had been widely anticipated. Initially, there was little reaction in the stock or bond markets. But later in the afternoon, stocks sold off, and major indexes closed modestly lower.
“The Fed stuck to script today, pushing ahead with another rate hike,” said Michael Pearce, senior U.S. economist at Capital Economics.
But Pearce added, “Our view is that officials are still underestimating just how quickly the economy is likely to lose momentum next year.”
He said he expects the Fed to suspend its rate hikes by mid-2019 — and then feel compelled to cut rates by early 2020 to support the economy.
In its updated outlook Wednesday, the Fed foresees one final rate hike after 2019 — in 2020 — which would leave its benchmark at 3.4 percent. At that point, it would regard its policy as modestly restraining growth. The Fed seeks to slow the economy when it reaches full employment to prevent a tight job market from raising inflation too high.
President Donald Trump has argued publicly against higher rates, complaining that they would blunt his efforts to boost growth through tax cuts and deregulation.
The Fed’s latest forecast predicts that the unemployment rate, now 3.9 percent, will reach 3.7 percent by the end of this year and then 3.5 percent next year. Not since the late 1960s has unemployment fallen that low.
The central bank expects unemployment to begin rising to 3.7 percent at the end of 2021. It foresees the economy growing 3.1 percent this year before slowing to 2.5 percent in 2019, 2 percent in 2020 and 1.8 percent in 2021.
The Fed sees the economy’s longrun growth at a 1.8 percent annual rate — far below the Trump administration’s projections for a sustained rate of 3 percent.