Thursday, December 20, 2018
The Federal Reserve raised its key interest rate Wednesday for the fourth time this year to reflect the U.S. economy’s continued strength, but signaled that it expects to slow its rate hikes next year.
Despite the forecast for fewer hikes, investors sent stocks plunging once Chairman Jerome Powell began a news conference, apparently disappointed that Powell didn’t go further to signal a slowdown in rate increases.
Wednesday’s quarter-point increase, to a range of 2.25 percent to 2.5 percent, lifted the Fed’s benchmark rate to its highest point since 2008. It will mean higher borrowing costs for many consumers and businesses.
The Fed’s move came despite President Donald Trump’s attacks in recent weeks on its rate hikes and on Powell personally. The president has complained that the moves are threatening the economy. At a news conference after the Fed’s announcement, Powell said Trump’s tweets and statements would have no bearing on the central bank’s policymaking.
“Nothing will deter us from doing what we think is the right thing to do,” Powell said.
The statement the Fed issued Wednesday after its latest policy meeting said that only “some” further gradual rate increases are likely; previously, it spoke simply of “further gradual increases.” And its new forecast projects two rate hikes next year, down from three the Fed had predicted in September.
U.S. stocks had been up sharply before the Fed’s announcement, but the Dow Jones Industrial Average closed down about 352 points. Bond prices surged, though, sending yields lower.
Diane Swonk, chief economist at Grant Thornton, said the Fed projected that it is prepared to be flexible in deciding on future hikes but the market had wanted even more assurances that the central bank is ready to hit the pause button.
“Much of that (Fed) flexibility was lost in translation for financial markets because the fed remains optimistic about growth,” Swonk said. The fear is that optimism could translate into more rate hikes in the future.
The central bank has raised rates with steady regularity as the U.S. economy has strengthened. Wednesday’s was the Fed’s ninth hike since it began gradually tightening credit three years ago. But a mix of factors – a global slowdown, a U.S.-China trade war, still-mild inflation, stomach-churning drops in stock prices – has led the Fed to consider slowing its rate hikes to avoid weakening the economy too much. It’s now likelier, as Powell said Wednesday, to suit its rate policy to the latest economic data – to become more flexible or, in Fed parlance, “data-dependent.”