US Fed in 3rd rate rise this year, on track for three more next year

The Fed has signalled confidence in the US economy with another rate rise, and remains on track for three more increases in 2018.

Janet Yellen’s term as Fed chief ends in February. Pic: AP

The US Federal Reserve said it would raise short-term interest rates for the third time this year and remained on track to chart a similar path next year, signalling continuity as the central bank enters a major leadership reshuffle.

Fed officials said they would increase their benchmark federal-funds rate by a quarter percentage point to a range between 1.25 per cent and 1.5 per cent. Officials revised up their projections for economic growth and said they expect to keep raising rates if the economy performs in line with their forecast.

Officials didn’t significantly change projections about the path of interest rates or inflation even though they now expect the economy to grow faster, and the labour market to tighten further, than they did in projections released three months ago.

Officials pencilled in three quarter-point rate increases for next year, as they had in September, and two increases each in 2019 and 2020.

“At the moment, the U.S. economy is performing well,” Fed Chairwoman Janet Yellen said at a press conference, after the Fed’s two-day policy meeting.

“The growth that we’re seeing, it’s not built on, for example, an unsustainable build-up of debt,” she added. “The global economy is doing well. We’re in a synchronised expansion. This is the first time in many years we’ve seen this ... I feel good about the economic outlook.”

New projections show officials expect the economy to grow at a 2.5 per cent rate this year and next, up from September projections of 2.4 per cent and 2.1 per cent, respectively. The Fed still expects the economy will grow at 1.8 per cent over the long-run, and today’s projections show officials now expect economic growth will surpass that level through 2020.

Officials didn’t change their forecasts significantly around inflation, even though they now project the unemployment rate to fall to 3.9 per cent in 2018 and 2019, down from prior forecasts of 4.1 per cent and below the level that they expect should prevail over the long run, which was unchanged at 4.6 per cent.

In its postmeeting statement, the Fed’s rate-setting committee described the job market as strong. “The committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will remain strong,” the statement said.

Chicago Fed President Charles Evans joined Minneapolis Fed President Neel Kashkari in casting dissenting votes because they wanted to hold rates steady.

The big question heading into their two-day meeting was how much Fed officials expected to lift rates in coming years. The prospect for new fiscal stimulus, combined with solid hiring and lofty asset values, could argue for picking up the pace to prevent the economy from overheating. But low inflation and modest wage growth could support the case for sticking with a very gradual approach.

By today, the Fed will have raised rates by a quarter percentage-point five times since late 2015, after keeping them near zero for seven years. In October, the Fed also started shrinking its $US4.5 trillion portfolio of bonds and other assets.

Since officials last met in early November, Congress has moved rapidly on legislation that would cut business and individual taxes by around $US1.4 trillion over the next decade. Before this week, many Fed officials refrained from building into their forecasts much prospect of fiscal stimulus because it wasn’t clear what Congress would pass.

House and Senate Republicans are reconciling different versions of tax bills that have passed their respective chambers with the goal of putting a unified plan before President Donald Trump to sign by Christmas.

Ms Yellen said during her postmeeting press conference that officials continue to expect the economy to expand at a moderate pace, adding that “while changes in tax policy will likely provide some lift to economic activity in the coming years,” the magnitude and timing of the boost to growth remains uncertain.

She said most Fed officials had incorporated some fiscal stimulus from the emerging tax package into their updated economic projections, but some had done so already in their previous estimates earlier this year.

Even so, she said, officials concluded that monetary policy doesn’t need to change significantly. “We continue to think ... a gradual path of interest rate increase remains appropriate,” she said.

She cautioned that the new projections shouldn’t be taken as estimates of the economic impact of a tax overhaul, stressing that “considerable uncertainty” about the effects remain.

Fed officials would welcome tax changes that boosted the economy’s growth potential as long as that coincided with the central bank’s ability to achieve its goals of full employment and stable, low inflation.

Ms Yellen added that she remained concerned over federal budget deficits that are projected to grow as the baby boom ages, even before the added effect of tax cuts. “This is something I’ve been saying for a long time. I am personally concerned about the US debt situation,” she said. “Taking what is already a significant problem and making it worse, it is a concern to me.”

Ms Yellen also said she worried higher deficits now could limit the scope for fiscal policy makers to respond aggressively to an economic downturn in the future.

Fed officials haven’t said whether or to what degree they believe the specific provisions of the House and Senate bills would boost productivity, such as by encouraging capital formation and new business investment.

That calculus will be especially important now that the unemployment rate-at 4.1 per cent, a 17-year low-is at or below the level that many Fed officials believe will generate faster inflation.

It hasn’t so far, presenting a challenge for the Fed.

On one hand, inflation has run below its annual 2 per cent target most of this year, reaching just 1.6 per cent in October by the central bank’s preferred gauge.

Another inflation measure, released this morning, showed a strong rise in energy prices but otherwise muted inflation in November.

On the other hand, with the economy so strong and more stimulus on the way, they don’t want to hold rates too low for too long and cause price pressures to surge out of control or fuel asset bubbles and other financial imbalances.

The US Federal Reserve Building in Washington. Pic: AP

While Fed officials see the economy growing faster and the labour market running hotter than they did three months ago, they haven’t seen a need to project more interest-rate increases because “inflation has run lower than we expect, and it could take a longer period of a very strong labour market in order to achieve the inflation objective,” Ms Yellen said.

Fed officials also are wrestling with the fact that the economy isn’t responding to its rate moves as it did in the past, making it harder to discern the right policy path.

Fed increases in short-term rates used to tighten credit more broadly, causing bond yields to rise and boosting other borrowing costs, such as for mortgages, credit cards and business loans. This year, instead, financial conditions have eased, with long-term bond yields drifting lower, stock prices rising to new highs and many consumer loan rates little changed.

Fed governor Jerome Powell is poised to take the lead on confronting these challenges as Ms Yellen’s successor after her term as chairwoman ends February 3.

Mr Powell was nominated last month to take the helm and is awaiting Senate confirmation, but should face no difficulty after a panel voted 22-1 last week to advance his nomination.

He has shown few signs of diverging sharply from Ms Yellen on monetary policy but has indicated he could offer a lighter touch on financial regulation.

Ms Yellen has said she would resign her seat on the Fed’s seven-member board once her successor takes over, which would make her the third governor to leave within a year.

Mr. Trump has filled one vacancy on the board and moved to fill a second one, in addition to nominating Mr Powell to become chairman. Mr Trump has two more openings to fill now and will have another after Ms Yellen leaves next year.

FULL TEXT OF THE FED STATEMENT

Information received since the Federal Open Market Committee met in November indicates that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further.

Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. 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. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labour market conditions will remain strong. Inflation on a 12-month basis is expected to remain somewhat below 2 per cent in the near term but to stabilise around the Committee’s 2 per cent objective over the medium term. Near- term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realised and expected labour market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1-1/2 per cent. The stance of monetary policy remains accommodative, thereby supporting strong labour market conditions and a sustained return to 2 per cent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and 2 per cent inflation. 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 international developments.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

Dow Jones Newswires, AP