The Federal Reserve has modestly raised a key interest rate for the third time this year in response to a strong U.S. economy and signaled that it foresees another rate hike before the year ends.
The Fed on Wednesday lifted its short-term rate—a benchmark for many consumer and business loans—by a quarter-point, to a range of 2 percent to 2.25 percent. It was its eighth hike since late 2015, and the Fed indicated that it expects to continue gradual increases. It 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.
The Fed’s actions and its updated economic forecasts Wednesday had been widely anticipated, and there was little immediate reaction in the stock or bond markets.
In its updated economic outlook, 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 in 2021. It foresees the economy, as measured by the gross domestic product, 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 long-run growth at a 1.8 percent annual rate—far below the Trump administration’s projections for a sustained rate of 3 percent.
Many analysts think the economy could weaken next year, in part from the effects of the trade conflicts Trump has pursued with China, Canada, Europe and other trading partners. The tariffs and counter-tariffs that have been imposed on imports and exports are having the effect of raising prices for some goods and supplies and potentially slowing growth.
Trump’s combative trade steps, including the tariffs he’s imposed on imported steel and Chinese goods, complicate the Fed’s decision-making. Economists worry that the Trump tariffs—and the resulting retaliation from America’s trading partners—could weaken the U.S. economy.
The Fed would normally respond to weaker growth by cutting interest rates. But tariffs, which are an import tax, can inflate prices. And the Fed typically counters higher inflation by raising rates.
Megan Greene, global chief economist at Manulife Asset Management, said she thought the tariffs are more likely to slow the economy than to accelerate inflation.
“The real risk of trade wars,” Greene wrote last week, “is a hit to growth, not a boost to inflation.”
Indeed, the Fed’s regional banks have reported that some businesses are delaying investments until they see some resolution to the trade hostilities. But for now, Greene wrote, “the Fed will not shift its rate path materially based on trade.”
Compounding the effects of the tariffs and retaliatory tariffs resulting from Trump’s trade war, other factors could slow growth next year. The benefits of tax cuts that took effect this year, along with increased government spending, for example, are widely expected to fade.
Still, some analysts hold to a more optimistic scenario: That momentum already built up from the government’s economic stimulus will keep strengthening the job market and lowering unemployment, already near a 50-year low. A tight employment market, in this scenario, will accelerate wages and inflation and prod the Fed to keep tightening credit to ensure that the economy doesn’t overheat.
The robust job market has helped make consumers, the main drivers of growth, more confident than they’ve been in nearly 18 years. Business investment is up. Americans are spending freely on cars, clothes and restaurant meals.
All the good news has helped fuel a stock market rally. Household wealth is up, too. It reached a record in the April-June quarter, although the gain is concentrated largely among the most affluent.
Many economists worry, though, that Trump’s combative trade policies could slow the economy. Trump insists that the tariffs he is imposing on Chinese imports, to which Beijing has retaliated, are needed to force China to halt unfair trading practices. But concern is growing that China won’t change its practices, the higher tariffs on U.S. and Chinese goods will become permanent and both economies—the world’s two largest—will suffer.
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