US Fed raises rates as policy outlook unchanged

US Fed raises rates as policy outlook unchanged

Howard Schneider and Jason Lange

The US Federal Reserve has raised interest rates as expected, and left its monetary policy outlook for the coming years largely unchanged amid steady economic growth and a strong job market.

In a policy statement that marked the end of the era of “accommodative” monetary policy, Fed policymakers lifted the benchmark overnight lending rate by a quarter of a percentage point to a range of 2% to 2.25%.

It still foresees another rate rise in December, three more next year, and one increase in 2020.

That would put the US central bank’s benchmark overnight lending rate at 3.4%, roughly half a percentage point above its estimated ‘neutral’ rate of interest, at which rates neither stimulate nor restrict the economy.

That tight policy stance is projected to stay level through 2021.

However, the Fed sees the US economy growing at a faster-than-expected 3.1% this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near the central bank’s 2% target.

“The labour market has continued to strengthen ... economic activity has been rising at a strong rate”, the Fed said in a statement that removed its longstanding reference to the fact that monetary policy remained “accommodative.”

It inserted no substitute language for the phrase, which had been a staple of its guidance for financial markets and households for much of the past decade. The 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.

The rate rise was the third this year and the seventh in the last eight quarters. Ahead of yesterday’s statement, traders put the chance of a rate increase at 95%.

The Fed’s latest projections show the US economy continuing at a steady pace through 2019, with GDP growth seen at 2.5% next year before it slows to 2% in 2020 and to 1.8% in 2021, as the impact of the recent tax cuts and government spending fade. Inflation was forecast to hover near 2% over the next three years, while the country’s unemployment rate is expected to fall to 3.5% next year and remain there through 2020 before rising slightly in 2021.

- Reuters

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