The Federal Reserve has raised a key interest rate for the third time this year in response to a strong U.S. economy and signaled that it expects to maintain a pace of gradual rate hikes.
The Fed on Wednesday lifted its short-term rate — a benchmark for many consumer and business loans — by a quarter-point to a range of 2 percent to 2.25 percent. It was the eighth hike since late 2015.
The central bank stuck with its previous forecast for a fourth rate increase before year’s end and for three more hikes in 2019.
The Fed dropped phrasing it had used for years that characterized its rate policy as “accommodative” by favoring low rates. In dropping that language, the central bank may be signaling its resolve to keep raising rates.
Many analysts think the economy could weaken next year, in part from the effects of the trade conflicts President Donald Trump has pursued with China, Canada, Europe and other trading partners. The tariffs and counter-tariffs that have been imposed on imports and exports are having the effect of raising prices for some goods and supplies and potentially slowing growth.
Compounding the effects of the tariffs and retaliatory tariffs resulting from Trump’s trade war, other factors could slow growth next year. The benefits of tax cuts that took effect this year, along with increased government spending, for example, are widely expected to fade.
Still, some analysts hold to a more optimistic scenario: That momentum already built up from the government’s economic stimulus will keep strengthening the job market and lowering unemployment — at 3.9 percent, already near a 50-year low. A tight employment market, in this scenario, will accelerate wages and inflation and prod the Fed to keep tightening credit to ensure that the economy doesn’t overheat.
The U.S. economy, as measured by the gross domestic product, is expected to grow 3 percent for 2018 as a whole. That would mark the strongest full-year gain in 13 years. For the first nine years of the economic expansion, annual GDP growth averaged only around 2.2 percent.
The robust job market has helped make consumers, the main drivers of growth, more confident than they’ve been in nearly 18 years. Business investment is up. Americans are spending freely on cars, clothes and restaurant meals.
All the good news has helped fuel a stock market rally. Household wealth is up, too. It reached a record in the April-June quarter, although the gain is concentrated largely among the most affluent.
Many economists worry, though, that Trump’s combative trade policies could slow the economy. Trump insists that the tariffs he is imposing on Chinese imports, to which Beijing has retaliated, are needed to force China to halt unfair trading practices. But concern is growing that China won’t change its practices, the higher tariffs on U.S. and Chinese goods will become permanent and both economies — the world’s two largest — will suffer.
Fed Chairman Jerome Powell has so far been circumspect in reflecting on Trump’s trade war. Powell has suggested that while higher tariffs are generally harmful, they could serve a healthy purpose if they eventually force Beijing to liberalize its trade practices.