Fed raises interest rates, keeps policy outlook unchanged for 2018
Exterior view of the US Federal Reserve building in Washington, DC. (AFP/KAREN BLEIER)
WASHINGTON: The US central bank on Wednesday (Dec 13) raised the benchmark interest rate for the third and final time this year, and officials indicated they are not likely to be more aggressive next year, at least for now.Citing the strong labour market and solid economy, the Fed's policy-setting Federal Open Market Committee increased the key lending rate to 1.25-1.5 percent, an increase of a quarter point.The quarterly forecasts by Fed officials showed no change in the expectations for 2018 and 2019, with three rate hikes expected next year and one in the following year, identical to their September projections.However, those projections are unlikely to have factored in the potential impact of the massive tax cuts which the House and Senate are near to finalizing.The plan is expected to add about US$1 trillion to the federal debt and some economists say a near-term boost from the tax plan could cause the Fed to raise rates more quickly.Two Fed officials voted against the rate increase, the first time there was more than one dissenter since November 2016. The Federal Reserve Bank president from Chicago, Charles Evans, and Minneapolis, Neel Kashkari, wanted the committee to hold off.
FEW CHANGESThe FOMC said it continues to expect the economy to "expand at a moderate pace," which will require only gradual changes in monetary policy."Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy," the FOMC said.But analysts will find few hints of the Fed's reasoning in the policy statement, as the wording was very little changed from the November meeting. The FOMC said the labor market will "remain strong," rather than the previous comment that it would "strengthen somewhat further."
Fed Chair Janet Yellen was set to hold a press conference, which could provide further clarity on the central bankers' thinking and what factors they will be looking for to accelerate pace of interest rate increases.Wall Street stocks, which were in positive territory prior to the Fed announcement, added a bit to those gains. About 10 minutes after the announcement, the S&P 500 was up 0.2 per cent at 2,668.73.ECONOMIC FORECASTSThe quarterly Summary of Economic Projections does show central bankers now are looking for slightly faster growth of 2.5 per cent next year, the same as for this year, before slowing to 2.1 per cent in 2019, and 2.0 per cent in 2020. The unemployment rate also is expected to continue to drop to 3.9 per cent next year from 4.1 per cent currently.The inflation forecast shows few signs that the Fed officials who are more concerned about rising prices have gained any traction. The median projection for the Fed's preferred inflation measure is 1.7 per cent for this year, up just a tenth from September, but otherwise is unchanged at 1.9 per cent next year, and two percent in 2019 and beyond.Yellen has acknowledged that central bankers are somewhat baffled by the absence of inflation, largely attributing it to transitory factors, as economic growth and falling unemployment have failed to push prices higher.The Fed's preferred inflation measure, the Personal Consumption Expenditures price index, remains well below two per cent and shows few signs it will rise soon. The 12-month core PCE is just 1.4 per cent.This will be Yellen's last press conference as President Donald Trump opted to replace her when her term ends in early February. She will preside over one more FOMC meeting in January before Fed governor Jerome Powell takes over.Yellen has presided over the Fed's cautious exit from the era of aggressive stimulus and easy money that helped lift the economy out of the Great Recession of 2007-2010, raising rates just five times since 2015.
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