Mon | May 20, 2019

Fed raises rates for third time

Published:Wednesday | September 26, 2018 | 3:08 PMAP

 

The United States Federal Reserve signalled its confidence Wednesday in the U.S. economy by raising a key interest rate for a third time this year, forecasting another rate hike before year's end and predicting that it will continue to tighten credit into 2020 to help manage growth and inflation.

The Fed lifted its short-term rate — a benchmark for many consumer and business loans — by a modest quarter-point to a range of 2 per cent to 2.25 per cent. It was its eighth hike since late 2015. The central bank 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 characterised its policy as "accommodative" — that is, favouring 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 signalling 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.

"Our economy is strong," Powell declared at the start of his news conference. "Growth is running at a healthy clip."

The chairman added, though: "Of course, that's not to say everything is perfect. The benefits of this strong economy have not reached all Americans. Many of our country's economic challenges are beyond the scope of the Fed."

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 per cent. 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.

The central bank foresees the economy, as measured by the gross domestic product, growing 3.1 per cent this year before slowing to 2.5 per cent in 2019, 2 per cent in 2020 and 1.8 per cent in 2021. The Fed sees the economy's long-run growth at a 1.8 per cent annual rate — far below the Trump administration's projections for a sustained rate of 3 per cent.

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.