The US central bank now foresees four rate hikes this year, up from the three it had previously forecast
The US Federal Reserve has raised its benchmark interest rate for the second time this year and signalled that it may step up its pace of rate increases because of solid economic growth and rising inflation.
The Fed now foresees four rate hikes this year, up from the three it had previously forecast.
The central bank on Wednesday raised its key short-term rate by a modest quarter-point to a still-low range of 1.75 per cent to 2 per cent. The move reflects the economy’s resilience, the job market’s strength and inflation that is finally nearing the Fed’s target level.
The action means consumers and businesses will face higher loan rates over time.
It was the Fed’s seventh rate increase since it began tightening credit in 2015, and it followed an increase in March this year.
When the Fed last met in May, it left its short-term rate unchanged. But it noted that inflation was edging near its 2 per cent target after years of remaining undesirably low. Should inflation eventually pick up, the Fed might move to tighten credit more aggressively.
A gradual rise in inflation is coinciding with new-found economic strength. After years in which the economy expanded at roughly a tepid 2 per cent annually, growth could top 3 per cent this year. Consumer and business spending is powering the economy, in part a result of the tax cut US President Donald Trump pushed through Congress late last year.
With employers hiring at a solid pace month after month, unemployment has reached 3.8 per cent. Not since 1969 has the jobless rate been lower.
Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years. It then raised rates once in 2015, once in 2016, three times in 2017 and now twice this year.
The Fed aims to achieve its mandates of maximising employment and stabilising prices by lowering rates to spur growth during times of economic weakness and raising rates to slow growth if the economy threatens to overheat.
When the Fed tightens credit, it aims to do so without derailing the economy. But if it miscalculates and overdoes the credit tightening, it can trigger a recession.
While many economists think the current expansion will exceed a 1990s streak, some worry about what might occur once the impact of the tax cuts begin to fade and the Fed’s gradual rate hikes begin to curb growth.
Diane Swonk, chief economist at Grant Thornton, has suggested that the economy could experience a “growth recession,” in which the gross domestic product slows so much that unemployment starts to rise.
The Fed’s pace of rate hikes for the rest of the year could end up reflecting a tug of war between a sturdy economy and the risks to growth, including trade tensions between United States and such key trading partners as China, the European Union, Canada and Mexico. All those countries have vowed to retaliate against any US tariffs with their own penalties against US goods.
A global trade war would risk cutting into US economic growth by depressing American export sales and raising inflation by making consumers and businesses pay more for imports.
The Fed’s meeting this week is to be followed by policy meetings of two other major central banks – the European Central Bank on Thursday and the Bank of Japan on Friday.
While Japan’s central bank is not expected to make any major policy shifts, anticipation is rising that the ECB may outline as early as this week plans to begin paring its bond-buying stimulus programme as a prelude to ending them altogether.