Federal Reserve Hikes Interest Rates for Third Time This Year, Keep 2018 Policy Outlook Unchanged
The Federal Reserve moved ahead with its third rate hike of the year Wednesday, signaling renewed confidence in the domestic economy. In doing so, policymakers affirmed their outlook for three more upward adjustments in 2018.
As expected, the Federal Open Market Committee (FOMC) voted to raise the federal funds rate by 25 basis points to 1.5% on Wednesday. That was the third quarter-point adjustment of the year, with the previous occurring in June.
Seven FOMC members voted for the measure while two dissented.
The central bank also confirmed it would increase the monthly pace of reducing its balance sheet beginning to $20 billion beginning in January from $10 billion currently.
“This change highlights that the committee expects the labor market to remain strong, with sustained job creation, ample opportunities for workers and rising wages,” central bank Chair Janet Yellen told reporters Wednesday following the decision.
Although Wednesday wasn’t Yellen’s final rate decision as head, it was the last to feature the quarterly projection materials. Yellen will step aside in February as Jerome Powell takes a the chair.
Policymakers upwardly revised their outlook on the domestic economy, arguing that volatile weather failed to tame a deepening recovery. The data certainly corroborate that point after the Commerce Department confirmed a faster pace of expansion in the third quarter. In fact, the U.S. economy strung together its fastest six-month expansion in years betwen April and September.
The Fed revised its 2018 growth outlook to 2.5% from 2.1% previously.
“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 central bank said.
Despite a more bullish outlook, the Fed gave no indication it would adopt a more hawkish rate-hike path. This moderate approach is expected to continue under the guidance of Jerome Powell in February. The Fed’s median forecast pegged the benchmark interest rate at 2.1% at the end of 2018. Analysts say that could reflect ongoing concern over sluggish inflation and wage growth.
Average hourly earnings have lagged behind the historic average throughout the recovery, raising concerns about the quality of jobs being created in the labor market. Meanwhile, the Fed’s preferred gauge of inflation – the core personal consumption expenditures (PCE) index – averaged just 1.6% annually in October. That’s below the Fed’s target of 2% annually.
Featured image courtesy of Shutterstock.