A "particularly brilliant" moment brings another rise in Fed rates

WASHINGTON – Federal Reserve Chairman Jerome H. Powell said on Wednesday that the US economy is enjoying a "particularly positive moment" as the Fed announces a much-anticipated hike in its key rate and announces its willingness to continue rising. rates.

Mr. Powell pointed out that the decision to raise rates to between 2 and 2.25% was not intended to hinder further growth. "My colleagues and I are doing everything in our power to keep the economy strong, healthy and moving forward," he said.

But the Fed's decision was criticized almost immediately by President Trump, who opened a press conference Wednesday afternoon declaring himself "not happy" with higher rates.

Trump once again broke with the practice of his recent predecessors, who avoided public comment on monetary policy. Higher interest rates raise the cost of federal borrowing, and Trump, whose tax policies have greatly increased the size of federal borrowing, suggested he would prefer lower borrowing costs. "We could do other things with money," he said.

He added, however, that the Fed is raising rates "because we are doing so well".

The Fed's decision, announced after a two-day meeting of the Federal Open Market Commission, which defines monetary policy, represents the eighth time that the Fed has raised interest rates since the financial crisis hit. 2008 and for the third time this year. Another increase is expected in December.

The Fed has described the economic conditions as "strong". She predicted that growth could reach 3% this year, before slowing down in the coming years. Unemployment remains low, inflation remains around the 2% pace that the Fed considers optimal and the pace of investment has increased, he added.

For the first time in recent years, monetary policy has not been described as "accommodating", indicating that its policy rate is returning to a level the Fed considers neutral, which means that monetary policy neither stimulates does not slow down economic growth.

Mr. Powell pointed out, however, that the change in wording was not intended to signal a policy change. He said monetary policy remains accommodative for the moment.

A number of Mr. Powell's colleagues have publicly argued that the Fed likely had to raise rates to a level that is beginning to restrain economic activity. Last year, the Fed warned that it was not necessary to cut taxes in full economic expansion. Mr. Trump and Congress ignored this advice, cutting taxes and increasing spending. The result has been a short-term increase in economic growth, which could, according to some Fed officials, lead to higher inflation.

Powell said the gradual rate hikes remain the best way for the Fed to navigate the risk of overheating the economy and inflation, as well as the danger of the economy slowing down.

"We think that the gradual increase in interest rates is the way we take both risks seriously," he said.

Powell also said the Fed saw little inflationary pressure.

In a new forecast cycle released by the Fed on Wednesday, policymakers predicted the central bank would raise rates five times by the end of 2020.

Asked whether he agreed, Powell underlined his uncertainty over the medium-term economic outlook and the Fed's policy path. He described the prospect of a restrictive monetary policy as "very possible" but added that "it depends" on changing economic conditions.

Speaking before Trump released his latest criticism of Fed policy, Powell said the Fed was carrying out its mission and "we are ignoring political factors."

But Trump's policy, if not his policy, could surely influence the Fed's trajectory given the uncertainty surrounding the trade war that the president has begun with China, the European Union, Canada and Mexico.

Powell said the Fed was hearing "renewed concern from businesses across the country" about the economic impact of these tariffs. But Powell added that the Fed has yet to see a negative effect on economic data.

The Fed chairman highlighted some areas in which the president's policies could create surprises on the rise.

Republicans argued that tax cuts would increase economic growth by creating "supply-side" incentives to increase investment in the economy. Mr. Powell said it was too early to judge the effects, but "we hope they are huge."

He also expressed hope that the Fed would continue to be surprised by the number of Americans returning to the workforce as the economy grows stronger.

Some Fed officials and a wider group of outside economists say the Fed is moving too fast to raise rates. They point out the slow pace of wage growth, as it is clear that the labor market is still underdeveloped. Powell acknowledged Wednesday that the gains from economic growth have not been evenly distributed.

"The benefits of this strong economy have not reached all Americans," he said.

In the latest batch of Fed economic projections, 12 of the 16 officials who submitted forecasts said they planned to raise rates in December.

Fed officials predicted three rate hikes in 2019 and one in 2020. The new forecasts, which included for the first time 2021, showed that Fed officials planned to end the rate hike cycle in 2020. None of the highest rates far exceed the middle: eight hikes in hand, five more planned.

Markets continue to anticipate a decline in rate hikes over the next few years, partly because of doubts about continued economic growth.

"Our view is that the Fed will continue its gradual rate hikes for the moment, but that the authorities still underestimate the speed with which the economy will lose momentum next year, while the stimulus, economist Senior US at Capital Economics "We expect the Fed to expect rate hikes and start cutting rates by 2020".

Until now, there are few signs that the Fed is compressing economic growth. Consumer borrowing costs are rising, but rates remain quite low by historical standards. The average rate on a 30-year mortgage reached 4.55% in August, against 3.96% in December 2015, according to Freddie Mac.

As rates rise, the economic effects are likely to increase. Jonathan Smoke, chief economist at Cox Automotive, said the Fed's rate hikes raised the average payment cost on a five-year auto loan by about 2%.

"It's not going to get any better for consumers or the industry here," Smoke said.