Fed raises rates but cuts 2019 forecast

http://www.bbc.co.uk/news/business-46624722

The Federal Reserve in Washington in August 2018Image copyright
Reuters

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The Federal Reserve has been gradually raising interest rates since 2015

The Federal Reserve has raised interest rates again – but future increases may come at a slower pace.

Officials at the US central bank voted to lift the Fed’s key interest rate by 0.25%, to a target range of 2.25%-2.5%.

But estimates released on Wednesday show most members expect two rate increases in 2019 – not three, as previously forecast.

The shift follows a downturn in US financial markets and concerns about slowing growth in the US and abroad.

Officials now expect economic growth of 2.3% in 2019, down from the 2.5% they anticipated in September.

Members also said they expect inflation to hover around 1.9% next year, compared to a 2% forecast in September.

Greg McBride, chief financial analyst at Bankrate.com, a personal finance website, said: “The Fed downshifted their projections of 2019 economic growth, inflation, and interest rate hikes – not in a big way but enough to remove the urgency of repeated rate hikes.”

The Fed has been gradually raising interest rates since 2015, moving the US away from the ultra-low rates put in place during the financial crisis to spur economic activity.

Wednesday’s decision, which was widely expected, marked the ninth increase since 2015 and the fourth this year.

The moves have made borrowing more expensive, contributing to slowdowns in some sectors, such as housing.

With economic growth expected to slow, some worry that further increases risk stifling economic activity.

Political independence

US President Donald Trump has been among the loudest voices calling on the Fed to hold off on further increases.

At a press conference on Wednesday, Federal Reserve Chair Jerome “Jay” Powell defended the Fed’s independence, saying that political pressure plays “no role whatsoever” in its discussions or decisions.

He said the strength of the economy – which is expected to grow about 3% this year – justified another rate rise, despite recent “cross currents”.

“We think this move was appropriate for what is a very healthy economy,” he said. “Policy at this point does not need to be accommodative.”

Mr Powell added that the Fed has no plans to change its ongoing reduction of its portfolio of Treasuries and mortgage-backed securities, as Mr Trump appeared to suggest in a tweet this week.

Market reaction

Shares sank after the announcement, reversing earlier gains. The Dow and S&P 500 fell about 1.6%, while the Nasdaq was down more than 2%.

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AFP/Getty

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Federal Reserve Chair Jerome Powell said there is “significant uncertainty” about future rate increases

Analysts said the Fed did not appear as concerned about the economy as some investors might have expected.

“The downgrade to their 2019 growth forecast is pretty modest,” said Brian Coulton, chief economist at Fitch Ratings.

“Given the stock market declines and negative international economic news – recognised in the statement – this still points to quite a bit of confidence at the Fed in the ability of the US economy to withstand a few more rate hikes.”

‘Significant uncertainty’

In its official statement, the Fed said increases to its benchmark rate would help the US economy sustain its expansion, keep the unemployment rate low and inflation near 2%.

However, the Fed qualified its position a bit, noting that “some” further gradual increases would be justified.

Members also lowered their forecast for interest rates in 2020 and 2021.

On average, they now expect the benchmark federal funds rate to hit about 3.1%, down from the 3.4% forecasted in September.

Mr Powell cautioned that the Fed does not have a pre-set path, and would be guided by data.

“There is significant uncertainty about both the path and ultimate destination of any further rate increases,” he said.

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