By Sam Fleming in Washington
The Federal Reserve raised short-term interest rates for a third time this year and signalled it will forge ahead with plans to gradually tighten policy even as central bankers face White House pressure for low borrowing costs and concerns over the trade war with China.
The Federal Open Market Committee boosted the target range for its key rate by another quarter point to 2 to 2.25 per cent, in the eighth increase of the current cycle, while teeing up a further increase at its meeting in December.
The Fed dropped previous assurances that policy is “accommodative” as it removes the economic stimulus it put in place during the crisis. Median forecasts released by the Fed’s policymakers pointed to one more rate rise this year, followed by three increases in 2019 and another in 2020 — in line with previous expectations.
The US central bank is staying on course for tighter policy as unemployment heads toward multi-decade lows, wage growth accelerates to its quickest pace in nine years, and estimates point to annualised third-quarter growth exceeding 4 per cent. Donald Trump’s decision to impose tariffs on nearly $200bn of Chinese imports has dented confidence among some US businesses, but the Fed made no reference to trade worries in its post-meeting statement.
Instead, it gave a bullish update on the economy, which it expects to grow by more than 3 per cent this year, saying activity growth and job gains have been strong, as have spending and corporate investment. Risks to the outlook remain “roughly balanced,” it said.
The prospect of rates reaching neutral levels — those that neither boost the economy nor hold it back — has opened up a debate over the extent to which officials want to clamp down on the economy by increasing them further. Some Fed officials have argued that rates should be lifted into restrictive territory as they respond to strong financial markets, above-trend growth, steady tightening in the jobs market and inflation that has largely returned to the central bank’s 2 per cent target.
Others want to see a pause when rates are at neutral. The Fed’s decision to drop the “accommodative” language may be taken by some investors as a signal that the Fed may not need to lift rates that much further given their proximity to neutral settings. However some officials have pointed to surging asset values and corporate borrowing as evidence that financial stability risks are rising, adding to arguments in favour of further tightening.
The median of the latest forecasts suggest the middle of the Fed’s target range will peak at 3.4 per cent in 2020, remaining at that level in 2021. That is above the Fed’s estimate for the longer-run level of the rate, which edged up to 3 per cent.
The rate rises have come against a background of griping from president Donald Trump, who has said he is “not thrilled” by the Fed’s tightening policy. Further complicating the backdrop are White House trade policies that impose 10 per cent tariffs on $200bn of Chinese products, on top of previous levies on steel and aluminium imports. Fed chairman Jay Powell is likely to be asked about the trade implications when he holds a press conference starting at 230pm eastern time today.