2 more in­ter­est rate hikes ex­pected

Houston Chronicle - - BUSINESS - By Jim Tankersley and Neil Ir­win

WASH­ING­TON — The Fed­eral Re­serve raised in­ter­est rates Wed­nes­day and sig­naled that two ad­di­tional in­creases were on the way this year, as of­fi­cials ex­pressed con­fi­dence that the U.S. econ­omy was strong enough for bor­row­ing costs to rise with­out chok­ing off eco­nomic growth.

Jerome Pow­ell, the Fed chair­man, speak­ing in un­usu­ally blunt terms at a news con­fer­ence Wed­nes­day, said the econ­omy had strength­ened sig­nif­i­cantly since the 2008 fi­nan­cial cri­sis and was ap­proach­ing a “nor­mal” level that could al­low the Fed to soon step back and play less of a hands-on role in en­cour­ag­ing eco­nomic ac­tiv­ity.

The Fed’s op­ti­mism about the state of the econ­omy is likely to trans­late into higher bor­row­ing costs for cars, home mort­gages

and credit cards over the next year as the cen­tral bank raises in­ter­est rates more quickly than was an­tic­i­pated.

Wed­nes­day’s rate in­crease was the sec­ond this year and the sev­enth since the end of the Great Re­ces­sion and brings the Fed’s bench­mark rate to a range of 1.75 to 2 per­cent. The last time the rate topped 2 per­cent was in late sum­mer 2008, when the econ­omy was con­tract­ing and the Fed was cut­ting rates to­ward zero, where they would re­main for years after the­cri­sis.

“The de­ci­sion you see to­day is an­other sign that the U.S. econ­omy is in great shape,” Pow­ell said after the Fed’s two-day pol­icy meet­ing. “Most peo­ple who want to find jobs are find­ing them.”

The in­creases this year are part of a grad­ual series of steps to re­turn rates to his­tor­i­cally nor­mal lev­els, and they re­flect both the Fed’s con­fi­dence in Amer­ica’s eco­nomic strength and its com­mit­ment to bring the in­fla­tion rate to its tar­get of 2 per­cent. Slow wage growth

But the march to­ward higher in­ter­est rates comes as much of Amer­ica’s work­force con­tin­ues to ex­pe­ri­ence slow wage growth, de­spite a tight la­bor mar­ket that should, in the­ory, trans­late into higher wages as busi­nesses com­pete for work­ers.

The rise in con­sumer prices over the last year has ef­fec­tively wiped out any wage in­creases for non­super­vi­sory work­ers, the lat­est Con­sumer Price In­dex data sug­gests.

That is odd for an econ­omy with a tight la­bor mar­ket, with un­em­ploy­ment run­ning at 3.8 per­cent. ‘A bit of a puz­zle’

Pow­ell played down con­cerns about slow wage growth, ac­knowl­edg­ing it is “a bit of a puz­zle” but sug­gest­ing that it would nor­mal­ize as the econ­omy con­tin­ued to strengthen.

The Fed chair­man said growth was be­ing lifted, at least in the short term, by tax cuts and govern­ment spend­ing in­creases signed into law by Pres­i­dent Don­ald Trump last year. And he dis­missed, for now, con­cerns that Trump’s trade poli­cies, in­clud­ing tar­iffs on steel im­ports, were hurt­ing growth, say­ing the Fed had yet to see any data in­di­cat­ing an im­pact.

In a state­ment re­leased at the end of the meet­ing, Fed of­fi­cials noted that eco­nomic ac­tiv­ity had been ris­ing “at a solid rate” — a change from their May state­ment, when they called the rate “mod­er­ate.” Fed of­fi­cials now ex­pect the econ­omy to grow at a 2.8 per­cent rate this year, up from a 2.7 per­cent fore­cast in March. The un­em­ploy­ment rate is now pro­jected to fall to 3.6 per­cent by year’s end, down from a fore­cast of 3.8 per­cent in March. Bal­anc­ing act

The Fed now faces a tricky bal­anc­ing act as it tries to cal­i­brate how to keep the econ­omy chug­ging along. Rais­ing rates too quickly could snuff out the eco­nomic re­cov­ery, which has fi­nally be­gun to gain steam after years of slug­gish growth. But not rais­ing rates fast enough could al­low in­fla­tion to spiral out of con­trol.

Of­fi­cials raised their headline in­fla­tion rate fore­cast for the year as well, to 2.1 per­cent from 1.9 per­cent. The Fed now pre­dicts in­fla­tion will run slightly above its tar­get rate of 2 per­cent through 2020, at 2.1 per­cent each year, a slight over­shoot that Fed of­fi­cials have in­di­cated they are com­fort­able with, in part be­cause of slow wage growth.


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