Fed announces rate decision

Irving Hamilton
June 14, 2018

"The Fed's path of gradual rate hikes and slow (balance) sheet reduction seems well established at this point".

This report, released by Federal Reserve, includes the FOMC's projection for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member's interest rate forecasts. The media forecasts expect the unemployment rate to drop to 3.6% this year, down from March's projection of 3.8%.

The Federal Reserve hiked America's benchmark interest rate a quarter point on Wednesday to 1.75 to 2 per cent, a move that will likely cause a slight increase in mortgage, credit card, auto and small business loan rates. And since the Fed started its post-recession rate increases in late-2015, they've coincided with hikes so that the chair has an opportunity to explain the decision. It kept borrowing costs that low after the financial crisis to encourage businesses and consumers to spend and grow the economy. The first non-economist to run the Fed in more than three decades stood at a podium rather than sitting at a desk like Yellen and her predecessor, Ben Bernanke, did. Likewise, they saw the median Fed funds rate at 3.1% at the end of 2019, up from 2.9% in March 2018.

This hike, which was widely expected, is the Fed's second of 2018, and the central bank signalled it is likely to do two more increases by the end of this year.

Besides raising its projection for rate increases this year from three to four, the Fed removed a key sentence from the previous statement that had been viewed as foreseeing a need to keep rates low for an extended period.

Along with rising interest rate expectations. "Higher rates and higher payments will squeeze the buying power of households without a compensating increase in wages".

However, higher rates would help savers earn more interest on their deposits.

Press conference after every meeting would give the Fed more room to make decisions as the economy warrants, and to be less choreographed. "This change is only about improving communications".

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The Fed also signaled that it may raise rates twice more in 2018, with Fed Chair Jerome Powell saying that the USA economy was in "great shape".

In addition to a new dot plot, the Fed updated its forecasts for economic growth and inflation.

It was the Fed's seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year. That's weaker than the White House's forecast for 3% growth in 2021, suggesting the Fed is less optimistic about the boost from tax cuts. With the economy now nine years into an expansion, the move reflects the steadiness of growth, the job market's strength and inflation that's finally reaching the Fed's 2 percent target level. In its statement the central bank said that "economic activity has been rising at a solid rate".

While a few items remain on the US central bank's wish list, such as bigger gains in wages and productivity, the main goals of stable prices and full employment are effectively met. Officials also said that "indicators of longer-term inflation expectations are little changed".

"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability".

"In view of realized and expected labor market conditions and inflation, the Committee made a decision to raise the target range for the federal funds rate to 1-3/4 to 2 percent", the Fed said in a statement. Risks to the economic outlook appear roughly balanced.

Job growth has consistently outperformed in recent years, driving unemployment down to 3.8 percent in May, the lowest reading since 2000. Estimates of the long-run sustainable unemployment rate were unchanged at 4.5 per cent. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and worldwide developments.

"Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams".

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