Fed raises US interest rates, sees at least three more years of growth

Published: September 27, 2018 14:05:58 | Updated: October 01, 2018 12:52:40


US Federal Reserve Chairman Jerome Powell holds a news conference following a two-day Federal Open Market Committee (FOMC) policy meeting in Washington, US, September 26, 2018. Reuters

The US Federal Reserve raised interest rates on Wednesday and left intact its plans to steadily tighten monetary policy, as it forecast that the US economy would enjoy at least three more years of growth.

In a statement that marked the end of the era of “accommodative” monetary policy, Fed policymakers lifted the benchmark overnight lending rate by a quarter of a percentage point to a range of 2.00 per cent to 2.25 per cent.

The US central bank still foresees another rate hike in December, three more next year, and one increase in 2020.

That would put the benchmark overnight lending rate at 3.4 per cent, roughly half a percentage point above the Fed’s estimated “neutral” rate of interest, at which rates neither stimulate nor restrict the economy.

That tight policy stance is projected to stay level through 2021, the timeframe of the Fed’s latest economic projections.

“The thing that folks were watching for, which they went ahead and did, was remove the word ‘accommodative’ in regard to their monetary policy,” said Michael Arone, chief investment strategist at State Street Global Advisors.

“It does seem to potentially indicate they believe monetary policy is becoming less accommodative and getting more towards that neutral rate.”

Fed Chairman Jerome Powell said the removal of the wording, which had been a staple of the central bank’s guidance for financial markets and households for much of the past decade, did not signal a policy outlook change.

“Instead, it is a sign that policy is proceeding in line with our expectations,” Powell, who took over as head of the Fed earlier this year, said in a press conference after the release of the statement.

The US Treasury yield curve flattened and the US dollar .DXY briefly weakened against a basket of currencies. US stocks initially extended gains but fell later in the trading session, with bank and financial stocks getting hit hard.

The Fed sees the economy growing at a faster-than-expected 3.1 per cent this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2.0 per cent target.

“The labor market has continued to strengthen ... economic activity has been rising at a strong rate,” it said in its statement.

The Fed inserted no substitute language for the dropped ‘accommodative’ wording in its statement. That wording had become less and less accurate since the central bank began increasing rates in late 2015 from a near-zero level, and its removal means the Fed now considers rates near neutral.

New projections

Wednesday’s rate increase once again drew criticism from President Donald Trump, who has complained that the Fed’s actions are countering his efforts to boost the economy.

“We’re doing great as a country. Unfortunately they just raised interest rates because we are doing so well. I’m not happy about that,” Trump told a press conference on the sidelines of the United Nations General Assembly in New York.

“I’d rather pay down debt or do other things, create more jobs. So I’m worried about the fact that they seem to like raising interest rates.”

Powell, at his press conference, declined to say whether Fed policymakers had discussed Trump’s previous criticism of the central bank. Last month, Trump expressed his displeasure about rising rates and said the Fed should do more to boost the economy.

According to Reuters news agency, Powell, who was appointed by Trump and took over as Fed chairman earlier this year, said the central bank would remain independent.

“We don’t consider political factors or things like that,” the Fed chief said.

Wednesday’s rate hike was the third this year and the seventh in the last eight quarters. Ahead of Wednesday’s statement, traders put the chance of a rate increase at 95 per cent, according to CME Group.

The Fed’s latest projections show the economy continuing at a steady pace through 2019, with gross domestic product growth seen at 2.5 per cent next year before slowing to 2.0 per cent in 2020 and to 1.8 per cent in 2021, as the impact of recent tax cuts and government spending fades.

Inflation was forecast to hover near 2.0 per cent over the next three years, while the unemployment rate is expected to fall to 3.5 per cent next year and remain there through 2020 before rising slightly in 2021.

The jobless rate is currently 3.9 per cent.

With risks described as roughly balanced, the statement left the Fed on a steady course for the next year.

Risks to the current run of economic growth, such as the threat of a damaging round of global tariff increases, were largely set aside.

There were no dissents in the Fed’s policy statement.

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