Federal Reserve holds interest rates steady, clears way for hike later
WASHINGTON – Escalating U.S. trade fights with other countries aren’t throwing the Federal Reserve off its course of gradually raising interest rates as the economy strengthens. At least not yet.
The Fed held interest rates steady Wednesday but upgraded its economic outlook and downplayed the trade skirmishes, clearing the way for a rate increase in September and possibly another at year-end.
The central bank’s policymaking committee kept its benchmark short-term rate at a range of 1¾ percent to 2 percent. In a statement after a two-day meeting, Fed officials described economic growth as “strong” and didn’t mention the trade conflicts, a signal they’re sticking to their latest forecast of two more quarter-point rate hikes this year.
Fed fund futures markets foresee a 91 percent chance of a rate increase in September and 65 percent odds of another move in December.
Fed policymakers have already bumped up the key rate in March and June, capping a total of seven increases since late 2015 after rates stayed near zero for years following the 2008 financial crisis and recession. The increases are raising the costs of credit card debt and adjustable-rate mortgages, and modestly lifting bank CD rates.
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In testimony before Congress recently, Fed Chairman Jerome Powell acknowledged U.S. tariffs on imported steel, aluminum and other products – along with tit-for-tat duties by other countries – are crimping business investment. He said they would hurt economic growth if they didn’t ultimately lead to negotiations and lower tariffs. But he added it’s too early to predict the outcome.
And rather than note the risks to growth posed by the trade standoffs, Fed policymakers continued to describe risks to their outlook as appearing “roughly balanced” and reiterated they plan to raise rates gradually.
President Donald Trump recently took the highly unusual step of criticizing Fed rate hikes, which could lead to additional scrutiny if the Fed speeds up or slows down its anticipated pace of increases.
What it means
The Fed signaled a rate hike is likely in September by stepping up its economic outlook and omitting any mention of the trade conflicts, which, if not resolved quickly, could dampen the economy by goosing inflation and hobbling exports.
The Fed didn’t tip its hand on whether policymakers will hoist rates in December for a fourth time in 2018, as they’ve forecast, noting that it depends on the path the economy takes in coming months.
But Fed officials gave no indication they’re retreating from that blueprint yet. Higher rates can batter the stock market by slowing economic growth and making less risky bonds relatively more attractive.
“This steady as it goes…mail it in (Fed) statement likely means the Fed will stick with” its plan for two more rate hikes this year, says Scott Anderson, chief economist of Bank of the West.
The Fed said inflation remains near its 2 percent annual target.
The Commerce Department said Tuesday the Fed’s preferred inflation measure edged up just modestly in June after reaching its goal earlier this year. That left unchanged both annual inflation, at 2.2 percent, and a core reading that strips out volatile food and energy items – which the Fed watches more closely – at 1.9 percent.
Still, the Fed expects core inflation to rise to 2.1 percent next year as unemployment continues to fall, pushing up wage growth.
The Fed said “economic activity has been rising at a strong rate,” a more bullish view than its June appraisal.
“Household spending and business fixed investment have grown strongly,” the Fed said.
The economy grew at a 4.1 percent annual rate in the second quarter, the fastest pace in nearly four years, Commerce said last week. Sweeping federal tax cuts juiced spending by consumers and businesses. Also helping was a surge in soybean exports as overseas companies scrambled to buy the crop before their countries’ counter-tariffs take effect.
Most economists expect growth to slow in the second half of 2018 as the tariffs begin to take a toll, though a healthy gain of nearly 3 percent is forecast for the year. Many analysts, however, are predicting a recession by 2020 as the boost from tax cuts and federal spending increases fades, while a swelling federal deficit helps push interest rates higher.
“Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low,” the Fed said.
Job growth has picked up, averaging 229,000 in May and June and 215,000 through the first half of the year, up from 182,000 in 2017.
The unemployment rate was 4 percent in June, just above the 18-year low of 3.8 percent reached the prior month. The Fed expects unemployment to fall to 3.5 percent by the end of 2019, spurring faster pay increases and inflation as employers compete for fewer available workers.