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US Fed raises key interest rate amid strong labor market
WASHINGTON, Dec 14, 2017 (BSS/AFP) – The US central bank on Wednesday
raised the benchmark interest rate for the third and final time this year,
and indicated it was not likely to be more aggressive next year, at least for
now.
Citing the strong labor 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 on the cost of loans for everything
from houses to cars.
The quarterly forecasts by Fed officials showed no change in the
expectations for policy moves in 2018 and 2019, with three rate hikes
expected next year and one in the following year, identical to their
September projections, indicating they are no more concerned about rising
prices.
Fed Chair Janet Yellen said the decision was prompted by the continued
strong labor market, even while officials expect job gains to slow somewhat.
“Allowing the labor market to overheat would raise the risk that monetary
policy would need to tighten abruptly at a later stage, jeopardizing the
economic expansion,” Yellen said at a press conference following the two-day
meeting.
However, there remains some disagreement among policymakers about the need
to raise rates since there are few signs that inflation is accelerating even
with very low unemployment.
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.
Yellen again acknowledged the uncertainty about prices, saying “our
understanding of the forces driving inflation is imperfect,” but the
committee expects the rate to move up to the Fed’s two percent target “over
the next couple of years.”
– ‘Uninteresting’ move –
The Fed’s rate move was widely expected, and there were few changes in the
wording of the statement or the economic forecasts for economists to focus
on.
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RDQ Economics: “This was about as uninteresting a rate hike as one can get
with very little in the policy statement or the projections that could be
described as surprising.”
The 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.
Wall Street stocks, which were in positive territory prior to the Fed
announcement, spilt by the close with the Dow Jones Industrial Average rising
0.4 percent, for its fourth straight record close, while the broad-based S&P
500 reversed direction and finished slightly lower.
This was Yellen’s last press conference as President Donald Trump opted to
replace her when her term ends in early February. She will chair one more
FOMC meeting in late 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
“I feel very positive about what we were able to accomplish,” she said.
– Tax cut impact –
Yellen said the Fed’s outlook factored in the potential impact of the
massive tax cuts which the House and Senate are near to finalizing.
While the impact on economic growth remains very uncertain, the cuts could
“provide some modest lift to GDP growth in the coming years,” she said.
That expectation could account for the higher growth and lower
unemployment rate forecast in the Fed’s quarterly Summary of Economic
Projections, she said.
The SEP showed central bankers now are looking for faster growth of 2.5
percent next year, compared to the previous forecast of 2.1 percent. The
unemployment rate also is expected to continue to drop to 3.9 percent next
year from 4.1 percent currently.
However, while Yellen said the Fed would welcome higher US growth, she
said it would be “challenging” to hit the four percent level that Trump
claimed would result.
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