Jerome Powell, chairman of the U.S. Federal Reserve, removes his glasses during a House Financial Services Committee hearing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)  

Fed Raises Rates and Says More Coming, Brushing Off Trump Jabs

(Bloomberg) -- Federal Reserve officials raised interest rates and cemented expectations for another hike this year as they reaffirmed that a strong U.S. economy will probably warrant further gradual increases well into 2019.

The quarter-point hike boosted the benchmark federal funds rate to a target range of 2 percent to 2.25 percent. The move reflected an upbeat assessment of the economy that was identical to the central bank’s last policy statement eight weeks ago, despite concerns over President Donald Trump’s escalating trade war.

“This gradual return to normal is helping to sustain this strong economy,” Chairman Jerome Powell told reporters Wednesday following a two-day meeting of the Federal Open market Committee in Washington.

After a decade-long expansion that’s been marked by mostly modest growth, Powell said “this is a pretty good moment for the U.S. economy.”

Growth and job gains have been “strong” and inflation remains near the central bank’s 2 percent target, the FOMC said in its statement. Barring a negative surprise, updated “dot plot” forecasts made a December rate hike almost certain, with 12 of 16 officials now expecting another increase by year-end. That grew from eight in their June projections.

Fed Raises Rates and Says More Coming, Brushing Off Trump Jabs

In the statement’s only change from the previous one issued Aug. 1, the committee dropped its long-standing description of monetary policy as “accommodative,” though Powell played down the significant of that move and said it was not a policy signal.

U.S. stocks fell and Treasuries rose after the Fed signaled that it’ll keep raising rates even as inflation remains tepid.

Powell and his colleagues are trying to pull off a feat the central bank has accomplished only once in its 104-year history: Engineer a soft landing of the economy by raising rates just enough to prevent overheating, but not so much that they trigger a recession.

While calling the economy strong and financial vulnerabilities moderate, he also said the central bank is hearing a “rising chorus” of concern about tariffs and the U.S.’s turn toward protectionist trade policies. Asked about the pressure from Trump to keep rates low, Powell said the Fed is focused on its mission to keep the economy healthy and doesn’t consider politics in the process.

Eighth Hike

After eight hikes since late 2015, the fed funds rate is now at the highest level since October 2008, just after the collapse of Lehman Brothers Holdings Inc. Voters on the committee backed the decision 9-0.

Trump isn’t making the Fed’s tricky task any easier. Aside from criticizing recent Fed rate hikes, he’s launched a trade war with China that threatens both to slow growth and boost inflation. Tariffs on an additional $200 billion of imported goods from China took effect Monday, along with retaliatory levies from Beijing.

Fed officials remained skeptical that Trump’s tax cuts will result in a persistent boost to economic growth. While they raised projections for expansion this year and next, they predicted that growth would slow to 1.8 percent by 2021. That’s in line with their estimate for the economy’s long-run potential and contrasts with the Trump administration’s goal of sustained 3 percent growth.

In their post-meeting statement and updated economic projections, Fed policy makers made no mention of trade worries and showed no sign they would soon halt the upward march of rates. Powell said the Fed has heard a “chorus” from businesses concerned by the trade outlook but so far had not seen an impact in the economic data.

“The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2 percent objective,” the statement said, repeating previous language.

Year Ahead

The committee, enlarged to 16 by the recent addition of new Fed Vice Chairman Richard Clarida, continued to anticipate three hikes in 2019, according to the median estimate.

Investors have questioned whether the Fed will ultimately prove so aggressive, preferring to price in two increases next year. If the central bank’s outlook prevails, traders will eventually be forced to adjust their rate-hike expectations and lift long- term rates.

The location of a neutral rate for policy is the subject of heated debate, with estimates within the committee ranging from 2.5 percent to 3.5 percent. Powell has repeatedly played down the importance of neutral given economists’ inability to know precisely where it lies.

Moreover, policy makers haven’t agreed on what they should do when rates reach neutral. Some favor a pause while others argue they should push rates above neutral before stopping.

Fed officials, in the statement, repeated their assessment that “risks to the economic outlook appear roughly balanced.”

The median forecast in the most recent set of projections continued to show officials expect borrowing costs to move above their estimate for the long-run neutral rate, reaching 3.4 percent in 2020, the same as in the June forecasts.

The new projections also included the first numbers for 2021, when officials see rates remaining steady at 3.4 percent. The median long-run neutral estimate moved up slightly to 3 percent from 2.9 percent.

The Fed’s hike widens a gap with its peers elsewhere. The European Central Bank said it will maintain its policy rate of minus 0.4 percent at least through next summer, while the Bank of Japan is set to stick with its current settings until 2020.

Higher U.S. rates, though, may force more emerging markets to tighten monetary policy to defend their currencies at a time when investors are punishing those with fault lines such as large current-account deficits. Powell said that while the fed focuses on its domestic mandate, what happens to growth abroad was clearly important for the U.S. economy.