Fed Leaves Key Rate Unchanged But Hints at Future Hikes

Fed chairman
The Federal Reserve building in Washington, D.C.

The Fed is keeping its key interest rate unchanged. It also hints that it’s preparing to resume raising rates as the economy shakes off the impact of recent hurricanes.

The Fed’s decision left its benchmark rate in a low range of 1 percent to 1.25 percent. It’s expected to hike rates in December. Its statement notes the economy has been rising “at a solid rate despite hurricane-related disruptions.”

The Fed reiterated its belief that inflation will resume moving toward its 2 percent target and said it was proceeding with a program to shrink its bond portfolio — a move that could mean higher long-term rates over time.

On Wednesday, the Fed signaled that it is still on course to keep raising rates at a gradual pace, and economists widely expect the next hike to occur at its meeting in December. Another rate hike, the third this year, would reflect the economy’s steady gains.

It would also suggest that the Fed is confident that inflation will resume rising toward its 2 percent target. The Fed’s economic forecasts in September projected that its favored inflation gauge will rise just 1.6 percent this year and 1.9 percent in 2018 before finally reaching the Fed’s 2 percent goal in 2019.

The problem with too-low inflation is that it can slow the economy by causing consumers to delay purchases if they think they can buy a product or service for a lower price later. And so far this year, inflation has actually been slowing. The trend has raised doubts about whether, as the Fed has suggested, lower-than-optimal inflation reflects mainly temporary factors, such as a price war among cellphone service providers, or rather something more fundamental.

Last week, the government estimated that the economy grew at a solid 3 percent annual rate in the July-September quarter despite severe damage from two hurricanes. The economy has now posted two straight quarters of at least 3 percent annual growth — the strongest two-quarter stretch in three years.

And while job growth was disrupted in September by the hurricanes, the unemployment rate reached a 16-year low of 4.2 percent.

Those factors, along with a stock market setting record highs, are thought to have put the Fed on a path to raise rates modestly later this year and thereby avoid having to tighten credit more aggressively later to prevent high inflation — something that would risk derailing the economy.

The Fed has raised rates four times in incremental moves beginning in late 2015, after its benchmark rate had stood at a record low near zero for seven years. The rate is still historically low at a range of 1 percent to 1.25 percent.

The seven-member board has three other vacancies, thereby providing Pres. Trump with additional ways to put his imprint on the central bank.

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