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Federal Reserve Raises Its Key Interest Rate

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From the Washington Post:

The Federal Reserve has lifted its key interest rate from 1.5 percent to 1.75 percent, the highest level since 2008.

The move, the central bank’s first major decision under new Chairman Jerome H. Powell, was widely expected as the U.S. economy continues to strengthen and stock markets remain near record highs. The Fed also significantly boosted its forecast for U.S. growth this year and next. The U.S. economy is on track to expand 2.7 percent this year and 2.4 percent in 2019, Fed officials now say, a jump from their previous projection done before the Republican tax cuts were finalized.

“The economic outlook has strengthened in recent months,” the Fed said in its statement. The Fed’s policy committee still met despite the snow that shut down most of Washington and the decision to raise rates was unanimous.

The Fed anticipates hiking rates three times in total in 2018, part of an ongoing move away from the extraordinary measures it took to stimulate the economy during and after the Great Recession. But the central bank opened the door to potentially doing four hikes. Higher rates are likely to be welcomed by savers but not by borrowers, who will face more expensive loan terms.

Americans should expect even faster growth and lower unemployment ahead, Fed officials said. Unemployment is now expected to fall to 3.8 percent this year and 3.6 percent in 2019, which would be the lowest level since 1969.

“Fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative,” Powell said in his first news conference, which was significantly shorter than those of his predecessor, Janet L. Yellen.

There’s growing concern among economists that the GOP tax cuts and the additional boost in federal government spending could cause the U.S. economy to overheat, requiring the Fed to hike rates even more than three times this year. Of the 15 Fed board members, six anticipate the Fed will hike four times this year and one believes five hikes will be necessary. It’s not quite enough to tip the official forecast to four rate increases, but it’s getting close.

“I think they will end up tightening four times this year, but they don’t have to signal that yet,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

The Fed hasn’t hiked rates four times in a year since 2006.

Powell, a Republican with a reputation for bipartisan work in Washington, was careful not to criticize President Trump or congressional leaders, but he did say the tax cuts are unlikely to lead to the 3 percent growth the White House is touting. He also noted that there’s growing fears about a trade war hurting the U.S. economy.

“A number of participants in this FOMC [the Fed board] did bring up the issue of tariffs,” Powell said, adding that the Fed is hearing from many business leaders that “trade policy has become a concern.”

But so far, Powell said, the Fed has not altered its economic projects because of Trump’s tariffs on aluminum and steel or likely trade actions against China.

Despite the move, U.S. interest rates are still far lower than the historical norm of about 5 percent. Rising interest rates are typically good for savers, who are likely to receive higher interest on the savings they have in the bank. Borrowers, however, face higher costs when they try to get a mortgage, auto loan or small business loan.

Americans with credit card debt are especially vulnerable to rising interest rates. The average credit card rate is already a full percentage point higher than it was a year ago and is likely to jump up more this year as the Fed hikes rates further.

“The economy is going along fine, not gangbusters and not rolling into a recession. It’s best described as fine,” said Michael Block, chief strategist at Rhino Trading. He thinks Powell’s biggest problem will be if growth picks up this year, but inflation and wages do not, a scenario that would complicate the Fed’s decisions on how high to raise rates.