Fed raises rates, says two more hikes in ’18

Amer­i­cans likely to see in­crease in bank sav­ings

USA TODAY US Edition - - MONEY - Paul David­son

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 hikes 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 per­cent to 2 per­cent. That’s within shout­ing dis­tance of its longer-run fore­cast of 2.9 per­cent. It’s the sec­ond rate hike 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 to 2009, the Fed kept its key

rate near zero to stim­u­late slug­gish 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.

The re­ac­tion in fi­nan­cial mar­kets to the Fed’s lat­est move was rel­a­tively muted Wed­nes­day, al­though stocks and bond prices fell.

The Dow Jones in­dus­trial av­er­age, which had been down about 10 points be­fore the Fed an­nounce­ment, ended down 120 points, or 0.5 per­cent, at

25,201. Govern­ment bonds sold off as fixed-in­come in­vestors be­gin to price in even higher rates than they had pre­vi­ously ex­pected later this year. The 10year Trea­sury yield, a bench­mark for long-term rates, edged up from 2.947 per­cent be­fore the Fed news to 2.976 per­cent. It is still well be­low its 2018 high of 3.113 per­cent from May 17.

❚ 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 hikes in 2019.

The Fed ex­pects its key rate to rise to

2.4 per­cent at the end of the year, up from its prior 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 hikes, up from seven in March.

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 fore­cast in­di­cates Fed pol­i­cy­mak­ers ex­pect fed­eral tax cuts and spend­ing in­creases to juice growth.

❚ The econ­omy: 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

9-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 tit-for-tat re­sponses are car­ried through, econ­o­mists say.

❚ Jobs: 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.

Since the Fed last met in midMarch, un­em­ploy­ment has fallen from

4.1 per­cent to an 18-year low of 3.8 per­cent. That could spur faster wage gains and in­fla­tion as busi­nesses com­pete more in­tensely for fewer avail­able work­ers. And that’s likely spurring the Fed to sig­nal a slightly faster boost in rates.

❚ In­fla­tion: Amid the im­prov­ing econ­omy, in­fla­tion has picked up lately and Fed pol­i­cy­mak­ers are look­ing for a slightly faster gain that leaves an­nual con­sumer price in­creases slightly above the Fed’s 2 per­cent tar­get, though just marginally.

The Fed said Wed­nes­day it ex­pects an­nual in­fla­tion to rise from 2 per­cent to 2.1 per­cent by the end of the year, up from its pre­vi­ous es­ti­mate of 1.9 per­cent, and 2.1 per­cent at the end of 2019, up from 2 per­cent. It ex­pects a core mea­sure that strips out volatile food and en­ergy items to edge up from 1.8 per­cent to 2 per­cent at the end of the year, up from its pre­vi­ous 1.9 per­cent es­ti­mate. But it didn’t change its pre­dic­tion that core in­fla­tion will hold steady 2.1 per­cent in 2019 and 2020.

Over­all, in­fla­tion re­mains largely con­tained. Many econ­o­mists cite long-term fac­tors such as the more global econ­omy, e-com­merce, the de­cline of unions and weak gains in the av­er­age worker’s out­put.

Still, Pow­ell said, “After many years of in­fla­tion be­low our ob­jec­tive, we do not want to de­clare vic­tory.”

❚ What it means: The Fed is try­ing to raise rates enough to head off an even­tual leap in in­fla­tion with­out de­rail­ing the re­cov­ery. The Fed ap­pears to be­lieve the fall­ing un­em­ploy­ment rate could spur faster in­fla­tion and it’s no longer treat­ing the econ­omy with kid gloves.

“The Fed is mov­ing to­wards the point where it be­lieves it might have to be pos­i­tively seek­ing to re­strain growth,” says Ian Shep­herd­son, chief econ­o­mist of Pan­theon Macroe­co­nomics.


“The main take­away is the econ­omy is do­ing very well,” Fed Chair­man Jerome Pow­ell said.

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