Fed Holds Rates Steady, Signals More Rate Increases Ahead -- Update
November 08 2018 - 6:10PM
Dow Jones News
By Nick Timiraos
WASHINGTON -- The Federal Reserve held short-term interest rates
steady Thursday and offered a mostly upbeat assessment of the U.S.
economy, suggesting another rate increase is likely by
year-end.
The Fed repeatedly emphasized the economy's strength in a
statement released after its two-day policy meeting. It offered
nothing to dispel market expectations that it would deliver its
fourth rate rise of the year in December.
Data released since officials last met in September indicate
"that the labor market has continued to strengthen and that
economic activity has been rising at a strong rate," the Fed
said.
The only significant change to the statement nodded to a recent
pullback in business investment from its rapid pace earlier this
year.
Officials voted unanimously in September to raise their
benchmark rate to a range between 2% and 2.25%. On Thursday, they
voted to leave it unchanged, again with no dissents.
The economy expanded at a 3.5% annual rate in the third quarter
after a 4.2% pace in the second quarter, the Commerce Department
reported. That is roughly double the growth rate Fed officials
believe can be sustained over the long run unless the supply of
workers, or their productivity, increases more rapidly.
Meanwhile, the unemployment rate held at 3.7% in October, a
nearly half-century low, and average hourly wages rose 3.1% from a
year earlier, the biggest year-to-year increase since 2009.
Broad strength in the economy and labor market -- powered in
recent quarters by solid consumer spending -- is more than enough
to offset any concerns about soft spots in the economy.
The housing sector, for example, has cooled this year, as
interest-rate increases have pushed mortgage rates to a seven-year
high. That has exacerbated affordability challenges stemming
initially from low supplies of homes for sale that have rapidly
pushed up prices in recent years.
Financial markets have also experienced more volatility. Stocks
and bonds were sold off last month as investors began to take more
seriously the Fed's plans to continue raising rates over the coming
year to prevent the economy from overheating. The potential of more
tariffs have also weighed on the outlook for corporate
earnings.
In September, Fed officials penciled in plans to raise their
benchmark short-term rate once more this year. Officials are
equally split over whether to raise rates two, three or four times
next year. That would push the rate closer to 3%, which is where
most officials expect it to settle over the long term -- a
so-called neutral level that neither spurs nor slows growth.
Fed Chairman Jerome Powell last month played down the debate
over whether the Fed would raise rates above neutral, suggesting it
was premature because rates are still boosting growth. Rates are "a
long way from neutral at this point, probably," he said. "We need
interest rates to be gradually, very gradually, moving back toward
normal."
The recent stock-market selloff appears unlikely to change the
Fed's plans. The market pullback received no mention in the Fed's
statement, unlike earlier downdrafts in 2015 and 2016.
Some officials have indicated the market movements could ease
concerns that low volatility and rising asset values have fueled
excessive risk-taking.
Inflation over the next year will be central to determining how
the Fed's policy path evolves. Inflation has been holding near the
Fed's 2% target for most of this year after undershooting it for
many years. The Fed views inflation around 2% as a sign of balanced
supply and demand.
"If we see things getting stronger and stronger, and inflation
moving up, then we might move a little quicker," Mr. Powell said
last month. "And if we see the economy weakening or inflation
moving down, we might move a little more slowly."
One key question is the degree to which higher wages could lead
businesses to raise prices.
Tariffs could also result in slightly higher inflation by
raising prices of imported goods, though a stronger dollar could
offset these effects somewhat by making it cheaper for Americans to
buy from overseas.
This week's Fed meeting was the first since President Trump
recently escalated his criticism of the central bank. In an
interview with The Wall Street Journal last month, Mr. Trump cited
the Fed as the top risk facing the economy. He earlier described
the Fed as crazy and out of control due to its plans to gradually
lift rates despite few obvious signs of inflation.
Fed officials have said they will make monetary-policy decisions
without any consideration of politics.
"We've stayed pretty focused on the facts about the economy,"
said Randal Quarles, the central bank's vice chairman for bank
supervision, in response to a question about Mr. Trump's criticism
last month. "The job of the Fed is to remain focused on the facts
of the economy and to be independent of the administration."
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
November 08, 2018 17:55 ET (22:55 GMT)
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