Fed panel stands pat on rates, signals December boost likely
WASHINGTON – With the economy sailing along, another interest rate hike is almost certainly in the cards next month.
The Federal Reserve held its key short-term rate steady Thursday but maintained its upbeat view of the economy, setting the stage for a fourth rate increase in 2018 at its Dec. 18-19 meeting.
As expected, the Fed’s policymaking committee kept the benchmark rate at a range of 2 percent to 21⁄ percent. But futures markets say there’s a
75 percent chance the central bank will bump it up again next month, according to CME Group, nudging up borrowing costs for consumers and businesses. Fed officials expect “further gradual” rate increases and have forecast three more hikes next year.
In a statement after a two-day meeting, the Fed described both economic and job growth as “strong.” The economy has turned in its best sixmonth stretch since 2014 while unemployment is at a near 50-year low.
Although economists say President Donald Trump’s escalating trade war with China helped dampen business capital spending gains in the third quarter, the Fed didn’t explicitly mention the conflict. Its statement, however, did note that business investment “has moderated from its rapid pace earlier in the year.”
Trump slapped a 10 percent tariff on
$200 billion in Chinese imports in late September, and China struck back by imposing duties on $60 billion in U.S. goods. The measures are increasing costs and narrowing profit margins for some U.S. companies while hammering exports for others.
Fed Chairman Jerome Powell has said the standoff sparked growing concerns among businesses around the country but hasn’t yet crimped the economy’s overall performance.
The Fed statement also steered clear of any mention of financial market worries. The stock market plunged after peaking in early October, though stocks have pared their losses this week. Also, the dollar has strengthened this year, making U.S. exports more expensive overseas.
Trump has taken the highly unusual step of criticizing Powell and the Fed, an independent agency, for lifting rates and impeding the faster economic growth he has promised.
The economy
The Fed said “economic activity has been rising at a strong rate.” It added that “household spending has continued to grow strongly.”
The economy grew at a 3.5 percent annual rate in the third quarter, the Commerce Department said last month. That followed a 4.2 percent gain in the prior quarter and capped the best sixmonth stretch since mid-2014.
Many economists expect growth to slow next year as the effects of the Republican tax cuts and spending increases fade and the trade war potentially takes a bigger toll. While 3 percent growth is widely predicted for this year — the fastest clip since 2015— many economists predict a recession in 2020.
Jobs
“The labor market has continued to strengthen,” the Fed said, adding that “job gains have been strong, on average, in recent months, and the unemployment rate has declined.”
Monthly job growth totaled 250,000 last month, surging in part because of a weak showing in September as result of Hurricane Florence. Employment gains have averaged a robust 213,000 this year despite an unemployment at a 49-year low of 3.7 percent, making it harder for businesses to find available workers.
Average wages were up 3.1 percent annually last month, fastest since 2009. Although economists say the increase was exaggerated by weak average pay in October 2017, the tight labor market is expected to continue to push pay increases above 3 percent.
Inflation
The Fed said inflation remained near its 2 percent annual target.
The Fed’s preferred measure of overall inflation fell from 2.2 percent to 2 percent in September. A core reading that strips out volatile food and energy items remained at 2 percent. In other words, the economy and inflation are precisely where the Fed would like them to be – not too hot and not too cold.
What it means
With the economy and labor market humming, the Fed has little reason to veer from its delicate balancing act: Gradually raising rates to head off a potential run-up in inflation without disrupting the 9-year-old economic expansion. Its bullish view of the economy Thursday suggests another rate hike is in the offing for December.
While the trade war is a trouble spot, it’s not yet hindering the economy broadly. Any mention of it or the market turbulence would have signaled the Fed could soon slow its rate hikes, a message Fed policymakers don’t want to convey.