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US Fed highlights strong economy, leaves rate untouched
WASHINGTON, Aug 2, 2018 (BSS/AFP) – The Federal Reserve on Wednesday
highlighted the strength of the US economy and labor markets, a signal
confirming interest rate increases are ahead, even as it held its fire for
now.
Financial markets already expect an increase in the benchmark lending rate
in September but the Fed’s word choices are likely to solidify expectations
for a fourth hike in December.
Economists scrutinize every word of the Fed’s statements for clues about
the next move, so the changes could be significant, especially coming amid
low unemployment, hefty monthly job gains and surging growth in the second
quarter.
The signal the Fed will continue its gradual rate increases is unlikely to
please President Donald Trump, who publicly chastised the central bank last
month, saying policy was undercutting his efforts to juice the economy.
The central bank’s policy committee said “economic activity has been
rising at a strong rate,” since the last meeting in June as the job market
continues to strengthen.
In the statement in June, the committee described the economy as growing
at a “solid rate.”
The statement also noted household spending had “grown strongly,” while it
last described things as having “picked up.”
The Fed once again said it expected to continue “further gradual
increases” in the overnight lending rate it charges to banks.
– Putting doubts to bed –
That will remove stimulus from the economy but is consistent with
continued economic growth and job gains while keeping inflation near the
Fed’s two percent target over the medium term, the statement said.
“If you had any doubts about a rate hike in September, you can put those
to bed,” economist Joel Naroff said in a note.
And, he said, “Given the Fed’s evaluation of current and future growth,
rate hikes are likely in September, December and possibly as many as four
more next year, unless the economy decelerates sharply.”
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US-BANK-RATE 2 LAST WASHINGTON
RDQ Economics said the upgrade to the Fed’s language given strong economic
data recently, but said it did not change the outlook for the central bank.
The key 10-year US Treasury note hit the three percent mark after the
decision.
“With the unemployment rate low, inflation near the target, but policy
still accommodative, we continue to expect the Fed to hike two more times
this year.”
The stock market did not like the statement, with the Dow dropping to its
lowest point of the day just after the announcement but recovering some
ground after, also concerned about the Trump administration to ramp up
pressure on China by considering tariffs of 25 percent rather than 10 percent
on the next $200 billion of goods targeted.
The Fed did not mention the trade tensions in the statement but cited it
in the discussions in June as a factor that could undermine strong business
confidence and investments.
The exchange of tariffs has led to rising prices for goods like steel and
aluminum, and companies continue to fret about the uncertainty created by the
disputes.
The vote to hold rates unchanged for now was unanimous and comes after the
economy grew 4.1 percent in the April-June quarter, while inflation has crept
up just above two percent and wages at long last are beginning to accelerate.
Economists do not expect the US economy to continue to expand at the same
pace for the rest of the year and the outlook is clouded by Trump’s trade
confrontations with multiple countries.
BSS/AFP/HR/1005