Fri | Jul 20, 2018

Fed foresees three more rate hikes in 2018

Published:Friday | December 15, 2017 | 12:00 AM
US Federal Reserve chair Janet Yellen.

The United States Federal Reserve is raising its key interest rate for the third time this year and foresees three additional hikes in 2018, a vote of confidence that the US economy remains on solid footing 8.5 years after the end of the Great Recession.

The Fed said Wednesday that it's lifting its short-term rate by a modest quarter-point to a still-low range of 1.25 per cent to 1.5 per cent. It is also continuing to slowly shrink its bond portfolio. Together, the two steps could lead over time to higher loan rates for consumers and businesses and slightly better returns for savers.

The central bank said in a statement after its latest policy meeting that it expects the job market and the economy to strengthen further. Partly as a result, it expects to keep raising rates at the same incremental pace next year under the leadership of Jerome Powell, who will succeed Janet Yellen as Fed chair in February.

Chris Probyn, chief economist at State Street Global Advisors, said he was surprised that Fed officials upgraded their forecast for economic growth next year and lowered their forecast for unemployment yet signalled no additional rate hikes.

"They're saying, 'We're going to get more growth, we're going to get lower unemployment, but we're not going to respond to it with any more tightening,'" he said. "They are prepared to let the economy run a little hotter."

The Fed's action was approved 7-2, with Charles Evans, president of the Fed's Chicago regional bank, and Neel Kashkari, head of the Minneapolis Fed, voting no. Both preferred to keep the benchmark rate unchanged.

The central bank's message Wednesday departed little from its recent statements. It still stresses that it expects to keep raising rates gradually. Its projections for future hikes, based on estimates of 16 officials, showed that the median expectation remains three rate hikes in 2018, at least two in 2019 and two more in 2020.

By then, the Fed's target for short-term rates would have reached 3.1 per cent slightly above its estimate of a long-term neutral rate of 2.8 per cent. That would mean the Fed would still be seeking to tighten credit three years from now.

At a news conference after the Fed's meeting, Yellen said she would work to provide a smooth transition for Powell. Powell has been a Yellen ally who backed her cautious stance towards rate hikes in his five years on the Fed's board.

- AP