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US Federal Reserve raises key interest rate to 1.75-2%
WASHINGTON, June 14, 2018 (BSS/AFP) – The US Federal Reserve raised the
benchmark lending rate on Wednesday, the second increase of the year, and
signaled it will be more aggressive about rate increases this year and next
amid “strong” economic growth.
The unanimous vote brings the federal funds rate to a range of 1.75-2.0
percent but the quarterly economic forecasts show central bankers now expect
the rate to end the year at 2.4 percent rather than the 2.1 percent projected
in March.
That implies four total rate increases this year.
The Fed last raised the benchmark in March, the sixth increase since
December 2015 as it tries to keep the economy growing at a sustainable pace
without fueling inflation.
The median forecast of members of the Fed’s rate-setting Federal Open
Market Committee puts the benchmark at 3.1 percent at the end of 2019, up
from the previous 2.9 percent, which signals four hikes next year rather than
three.
Wall Street was not happy by the aggressive new stance, and all three
major indexes turned negative right after the announcement, with the Dow down
0.23 percent.
Most economists had not expected the Fed to give a clear sign that an
additional rate increase was likely until later in the year.
That shift came as a single FOMC member shifted his or her forecast for
this year and next, breaking a virtual tie in the projections released in
March.
– More press conferences –
At his post-meeting press conference, Fed Chairman Jerome Powell also
announced that he will hold a press conference after every policy meeting,
rather than the current quarterly schedule.
The change will start in January following the meetings that are scheduled
roughly once every six weeks, to give the Fed “more opportunities to explain
our actions,” Powell told reporters.
But he said “having twice as many press conferences does not signal
anything about the timing or the pace of interest rate changes.”
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Economists had predicted the Fed would make this change to overcome the
common view that the central bank will not change the benchmark interest rate
at a meeting that does not include a press conference, which limits its
options.
– Inflation mounts –
The FOMC statement stressed that rising interest rates were unlikely to
derail economic growth — which the committee now characterizes as “strong”
rather than “moderate” — and again made clear the Fed had some tolerance for
inflation above its two percent target.
In another slight change of language — something sure to catch the
attention of Fed watchers — it said “further gradual increases” in the key
rate “will be consistent with sustained expansion of economic activity,
strong labor market conditions and inflation near the Committee’s symmetric
two percent objective over the medium term.”
The use of the terms “symmetric” and “medium term” is a clear indication
the Fed is not in a hurry to get inflation to two percent and will be
comfortable if prices rise above that level for a short time.
In its quarterly Summary of Economic Projections, officials projected the
Fed’s preferred inflation measure will accelerate only slightly, ending this
year at 2.1 percent rather than 1.9 percent, and holding at that level
through 2020.
That index currently is at two percent but other measures of consumer and
producer prices have accelerated, pushed by rising fuel prices, as well as
metals prices that could be the result of the steep import tariffs President
Donald Trump imposed.
The Fed watches price measures closely to determine how fast to raise
interest rates but has signaled that the two percent target is not a ceiling
and that it would be comfortable with inflation rising slightly above that
level for a time.
The FOMC’s economic growth forecasts were little changed, with 2018 GDP
seen rising 2.8 percent rather than 2.7 percent but unchanged at 2.4 percent
in 2019 and two percent in 2020.
The already historically low unemployment is projected to fall even
further, ending the year at 3.6 percent before settling at 3.5 percent in
2019 and 2020.
Only eight of the participants voted on policy at this meeting but all
join the discussion and submit forecasts.
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