2 more interest rate hikes expected
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.