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What to Watch From the Fed: An Interest Rate Increase and the Path Forward
Fed Raises Rates for Third Time in 2018
(about 4 hours later)
WASHINGTON — Wednesday is Fed Day, meaning the Federal Reserve’s Open Market Committee, which sets monetary policy, will issue a policy statement at 2 p.m., following a two-day meeting.
WASHINGTON — The Federal Reserve, as expected, raised its benchmark interest rate by one quarter of a percentage point on Wednesday, and indicated it plans to raise rates again in December.
■ Investors expect the Fed to increase its benchmark interest rate to a range of 2 percent to 2.25 percent, its third increase in 2018.
The Fed repeatedly described economic conditions as “strong” in a statement following a two-day meeting of its Federal Open Market Committee, which sets monetary policy.
■ The Fed is also likely to reinforce expectations that it will raise rates again in December.
“Economic activity has been rising at a strong rate,” the statement said, adding that job growth, and the growth of household spending and business investment, were also robust.
■ The big questions are about the Fed’s plans for 2019. A new batch of economic projections from the members of the committee will provide some indications about the central bank’s path.
The Fed moved its benchmark rate up to a range between 2 and 2.25 percent. It is the eighth time since the 2008 financial crisis that the Fed has raised rates, and the third time this year. The decision was unanimous.
The Federal Reserve warned last year that the economy, which was humming along, did not need a large tax cut. Congress went ahead and cut taxes anyway. So the Fed is responding, as promised, by raising rates to keep things from overheating.
For the first time in recent years, the Fed did not describe monetary policy as “accommodative,” indicating that its benchmark interest rate is rising back to a level that the Fed regards as neutral, meaning monetary policy is neither stimulating nor restraining economic growth.
Inflation is right where the Fed wants it, at a 2 percent annual pace. Unemployment is low, and Fed officials are sounding increasingly antsy about the low level of interest rates.
That does not mean the Fed is done raising rates. Fed officials warned last year that there was no need for a tax cut in the midst of a steady economic expansion. President Trump and Congress ignored that advice, cutting taxes and increasing spending. The result has been a short-term increase in economic growth, which has reinforced the Fed’s conviction that it needs to continue raising interest rates to maintain control of inflation, which is rising at roughly a 2 percent annual pace.
Wage growth remains weak, after accounting for inflation, but most Fed officials think little slack remains in the labor market.
In a new round of forecasts the Fed published Wednesday, members of the policy-making committee predicted the central bank would raise rates five more times by the end of 2020.
"The Fed has some catching up to do,” wrote Jan Hatzius, the chief economist at Goldman Sachs.
Mr. Trump has publicly bemoaned the higher rates. “I don’t like all this work that we’re putting into the economy and then I see rates going up,” he told CNBC in July. “I am not happy about it.”
Investors are so confident the Fed will raise rates that the increase is already priced into markets.
So far, however, there is little sign the Fed is crimping economic growth. Rates paid by consumers have climbed more slowly than the benchmark rate. The average rate on a 30-year mortgage loan, for example, reached 4.55 percent in August, up from 3.96 percent in December 2015, according to Freddie Mac. That is less than a third of the increase in the Fed rate over the same period.
Investors also are putting a high probability on a fifth-consecutive quarterly increase, in December. The Fed’s chairman, Jerome H. Powell, will have a chance to calibrate those expectations when he speaks at a news conference Wednesday afternoon, following the release of the Fed’s statement.
As it rises, the Fed’s benchmark rate is approaching a neutral level, meaning that, in the judgment of Fed officials, it would neither stimulate nor discourage economic activity. Reaching that level would be a significant milestone in the nation’s recovery from the 2008 financial crisis.
The Fed’s policy statements have described the level of interest rates as “accommodative.” According to the minutes of the Fed’s last meeting, in late July and early August, “many participants” thought the Fed should remove that “accommodative” language in the “not-too-distant future” to reflect the imminence of neutrality.
That moment could arrive on Wednesday. But the end of the accommodation does not mean the end of rate increases. Officials expect the neutral level to rise as the economy grows. The last round of economic projections, in June, predicted the neutral level would rise to 2.9 percent.
And most Fed officials expect to raise rates above that level. Lael Brainard, a Fed governor, said this month that the Trump administration’s efforts to stimulate the economy are likely to require higher rates. “Over the next year or two, barring unexpected developments, continued gradual increases in the federal funds rate are likely to be appropriate,” Ms. Brainard said.
The current rate-raising cycle may already have passed its midpoint. The Fed has raised rates seven times since the financial crisis. In addition to the likely rate increases on Wednesday and in December, Fed officials in June predicted three rate increases in 2019 and one more in 2020. That’s six in prospect.
On Wednesday, the Fed will publish its first policy forecast for 2021. Will it show any additional increases?
It’s worth noting that if the economy is still growing in 2021, it will be by some distance the longest economic expansion in United States history. Fed officials and other economists have said they see few obvious signs of economic stress on the horizon, and expansions do not die of age. But they do die.
One risk that has been gaining more attention is the growing gap between interest rates in the United States and the rest of the developed world, which could cause unsettling flows of capital across borders as investors chase higher rates. Another is the trade war between the United States and China.
The next meeting of the Fed’s policymaking committee is scheduled for Nov. 7 and 8, but nothing is likely to happen in November, because the Fed has fallen into a pattern of changing policy only at the four meetings each year that are accompanied by a news conference with the Fed’s chairman.
To update that convention, Mr. Powell will begin holding news conferences after each of the Fed’s eight scheduled meetings in 2019. The November meeting will be the last without a news conference.
