Fed hikes interest rates amid rising inflation

Ann Santiago
September 27, 2018

Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, DC.

Fed's view on U.S. economy The Fed sees the economy growing at a faster-than-expected 3.1 per cent this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2 per cent target, Reuters reported. That wording had become less and less accurate since the central bank began increasing rates in late 2015 from a near-zero level, and its removal means the Fed now considers rates near neutral. US stocks initially extended gains but fell later in the trading session, with bank and financial stocks getting hit hard. It also expects the unemployment rate to drop from a projected 3.7 percent this year to 3.5 percent next year. Eastern time to explain the rate hike.

Wednesday's economic projections will also give markets their first look at the Fed's forecasts for 2021, which Goldman Sachs economists said last week will "offer insight into the Fed's plan to manage the overshoot of its labor market target".

The Fed's actions and its updated economic forecasts Wednesday had been widely anticipated, and there was little immediate reaction in the stock or bond markets.

If the Fed had left in the reference to accommodative, it would have been a strong sign about more future hikes in order to get to neutral.


It's had that language in its rate decisions for the better part of a decade, but Wednesday's announcement removed that line completely - which suggests the Fed is no longer in a mood to keep rates low.

Others worry that the escalating trade war with China will drag on America's expansion. The tariffs Trump has imposed on imported steel and Chinese goods, in particular, complicate the Fed's decision-making. It foresees the economy growing 3.1 percent this year before slowing to 2.5 percent in 2019, 2 percent in 2020 and 1.8 percent in 2021.

That's because the tariffs - and the resulting retaliation from America's trading partners - could weaken the USA economy. "The Fed rate hike will further strengthen the dollar, and thereby put further pressure on the rupee".

Megan Greene, global chief economist at Manulife Asset Management, said she thought the tariffs were more likely to slow the economy than to accelerate inflation.

"The real risk of trade wars", Greene wrote last week, "is a hit to growth, not a boost to inflation". "I am not happy about that". "Household spending and business fixed investment have grown strongly", the Fed said. But he said rising inflation remains a threat resulting from Trump's trade policies.

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