Fed raises interest rates, keeps policy outlook unchanged for 2018

Exterior view of the US Federal Reserve building in Washington, DC. (AFP/KAREN BLEIER)

WASHINGTON: The US central bank on Wednesday (Dec 13) raised the benchmark interest rate for the third and final time this year, and officials indicated they are not likely to be more aggressive next year, at least for now.

Citing the strong labour market and solid economy, the Fed's policy-setting Federal Open Market Committee increased the key lending rate to 1.25-1.5 per cent, 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, jeopardising 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.

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, split by the close with the Dow Jones Industrial Average rising 0.4 per cent, 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 finalising.

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 per cent next year, compared to the previous forecast of 2.1 per cent. The unemployment rate also is expected to continue to drop to 3.9 per cent next year from 4.1 per cent 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.