Federal Reserve Chairman Jerome Powell testifies at a hearing of the Senate Committee on Banking, Housing and Urban Affairs in Washington on March 1, 2018.(Photo: Saul Loeb / AFP / Getty Images)

WASHINGTON – The economy is growing recently and the Fed is slowing down again.

By improving its economic outlook, the Federal Reserve on Wednesday raised its main short-term interest rate by a quarter point for the third time in 2018 and has maintained its forecast for a further increase later this year.

"Our economy is strong, growth is happening at a good pace, unemployment is low," Fed Chairman Jerome Powell told a news conference. "It's a good time for the US economy."

Fed rate hikes are expected to impact the economy, leading to higher borrowing costs for variable rate consumer loans such as credit cards, equity lines of credit , auto and variable rate mortgages. Although the effects of a single hike are modest, the central bank has increased its benchmark rate eight times since the end of 2015, significantly increasing monthly payments for borrowers.

The good news is that the strategy is finally increasing bank savings and CD rates for Americans who have been performing poorly for many years.

The Fed has raised the rate of federal funds – rate banks charge each other for overnight loans – a quarter point to a range of 2% to 2.25%. The central bank has kept the rate close to zero for years after the financial crisis and the 2007-09 recession, then eased it slightly.

But with an unemployment rate of 3.9%, close to its 18-year low and rising economic growth, Fed policymakers have accelerated the pace of rate increases this year.

In a statement after a two-day meeting, the Fed withdrew its earlier assertion that the interest rate policy "remains accommodative", a recognition that rates are approaching normal levels. Still, Powell added that rates remain low by historical standards,

The strength of the economy can be attributed in part to tax cuts and increases in spending attributable to the Trump administration.

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Jerome Powell was appointed chairman of the Federal Reserve on Monday, replacing Janet Yellen.
Newslook

The Fed statement avoided any mention of escalating trade war with other countries. Powell said it could hinder the economy if it persists, but give a boost if it solves favorably for the United States by lowering tariffs on US exports.

"We have heard a growing number of concerns from businesses in the country," Powell said. But, he added, while high US tariffs that boost consumer prices are "a risk," he added that "we do not see it yet" in overall inflation. And even if all the proposed tariffs are imposed, the impact could still be relatively moderate on the basis of economic forecasts, he added.

How rates will go up

The Fed reiterated that it foresaw "further gradual increases" in its benchmark rate. He maintained his forecast for a fourth rate hike this year and three more in 2019.

According to the Fed's estimates, the key rate should reach 2.4% at the end of the year, 3.1% at the end of 2019 and 3.4% at the end of 2020.

The projection indicates that officials do not take into account the lasting impact of commercial skirmishes in their forecasts – at least not yet.

President Trump has publicly complained about Fed rate hikes in recent months, saying he is tempering the rapid growth that he has promised. But Powell said on Wednesday: "We do not consider political factors or that kind of thing."

Economy

"Household spending and business fixed investment has risen sharply," said the Fed.

Fed policymakers are forecasting economic growth of 3.1 percent this year, up from 2.8 percent in June. They expect growth to slow to 2.5% next year, slightly above their previous estimate of 2.4% and 1.8% by 2021.

The economy grew at an annual rate of 4.2% in the second quarter, the fastest in four years, and analysts expect growth of 3% this year, which would be the strongest report since 2005 .

Some economists, however, fear that President Trump's trade war, particularly the new $ 200 billion tax imposed this week on Chinese imports, will reduce the economy by next year. This could coincide with the downward effects of tax cuts and increased spending, as well as the slowdown in home sales.

Meanwhile, the government's stimulus package is widening the federal deficit. Some economists worry that this will raise long-term rates and slow growth in the next few years.

jobs

The Fed estimates that the unemployment rate of 3.9% will fall to 3.7% at the end of the year, slightly above its previous forecast, and to 3.5% by the end of 2019.

"Employment gains have been strong, on average, in recent months, and the unemployment rate has remained low," the Fed said.

Monthly employment gains averaged 207,000 this year, compared to 182,000 in 2017. And annual wage growth reached a nine-year high of 2.9% in August. The low unemployment rate makes it more difficult for employers to find workers, pushing them to increase wages. The Fed is trying to outpace wage and price increases by continuing to gradually raise rates to modestly undermine borrowing and economic activity.

Annual inflation reached 2.3% in July, above the Fed's 2% target. However, Fed officials said they could tolerate faster inflation for some time because it was below their reference level for years. And a basic measure of inflation that excludes volatile food and energy products was the Fed's 2% target in July.

The central bank expects an annual inflation of 2.1% by the end of the year and 2% by the end of 2019. It predicts that core inflation will remain at 2%. % this year before rising to 2.1% next year.

While inflation is picking up, it has remained largely weak despite a booming economy, allowing the Fed to raise rates gradually. Many economists cite factors such as the spread of cheap online shopping and the decline of unions.

What this means

The Fed aims to achieve a delicate balance by raising rates sufficiently to avoid a rise in inflation without disrupting the nine-year economic expansion. By complicating the task: the unknown effects of trade disputes and the eventual liquidation of fiscal and stimulus measures.

Until now, with the strengthening of the economy and the labor market, the Fed is pursuing its rate hike plan and leaving no potential hurdle to undermine it.

TO CLOSE

Jerome Powell testified on Tuesday before Congress, his first public appearance as chairman of the Federal Reserve. Powell presented the semi-annual monetary policy report to the House Financial Services Committee, expressing a positive outlook. (February 27)
AP

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