June 19, 2019

Fed Raises Rates, Demonstrating Confidence in Health of Economy

Fed Raises Rates, Demonstrating Confidence in Health of Economy

The Federal Reserve announced a widely expected quarter-point increase in its benchmark interest rate on Wednesday, and signaled that it plans to continue raising rates next year.

The Fed emphasized the strength of economic growth in a statement released after a two-day meeting of its policymaking committee. It said firms keep adding jobs and consumers keep spending money.

The statement made no mention of recent turbulence in financial markets.

The Fed’s announcement offered a few crumbs for critics, including President Trump, who have urged the central bank to stop raising rates. In previous statements, the Fed had said it planned “further gradual increases” in its benchmark rate, conveying to investors that additional hikes were expected. Wednesday’s statement slightly calibrated those expectations by adding the word “some” to the beginning of that phrase, suggesting that the pace of rate increases is likely to slow.

A majority of Fed officials on Wednesday predicted the central bank would raise rates no more than twice next year. In September, most Fed officials had predicted at least three rate increases.

But the overall tone of the statement suggested that the Fed continues to regard current growth as more impressive than any storm clouds on the horizon, such as the recent weakness in global growth and an accompanying downturn in international financial markets. That continued optimism portends additional increases are likely, despite market gyrations and some signs of economic weakness.

Jerome H. Powell, the Fed’s chairman, said that developments, including the downturn in financial markets and a weakening of global growth, “may signal some softening relative to what we were expecting a few months ago.” But he added that the magnitude of that shift was relatively small. “In our view these developments have not fundamentally altered the outlook,” Mr. Powell said.

He said the United States economy “has continued to perform well” and that — while overall financial conditions have tightened — the Fed has only “modestly” lowered its projections as a result.

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

That said, Mr. Powell tried to emphasize that the Fed would continue to keep a close eye on economic conditions and said that the ultimate pace of rate increases is “not predetermined.” He said the Fed’s goal is to keep the economic expansion on track, keep the economy strong and keep inflation in check.

The decision to raise rates for the fifth consecutive quarter, by a unanimous vote of the Federal Open Market Committee, also amounted to a rejection of the view that the Fed should continue to help prop up the economy in hopes of increasing employment and wage gains. A separate economic outlook released by the Fed suggested ongoing strength in the labor market, with the unemployment rate projected to stay below 4 percent for at least the next three years.

The benchmark rate will move up into a range between 2.25 and 2.5 percent. Fed officials estimated the neutral rate — the rate at which the Fed will be neither stimulating nor discouraging economic growth — sits between 2.5 and 3.5 percent.

The Fed’s rate increases are intended to increase borrowing costs for businesses and consumers, and there are signs that higher rates on mortgages and car loans are beginning to weigh on demand. But the Fed noted that overall household spending “has continued to grow strongly.”

Mr. Powell also dismissed ongoing attacks on the Fed by Mr. Trump, who has warned the central bank to stop raising rates and criticized its rate hikes as disruptive to the economic expansion. “Political considerations have played no role,” in the Fed’s decisions, Mr. Powell said, adding that “nothing will deter us from doing exactly what we think is the right thing to do.”

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