Federal Reserve raises U.S. benchmark interest rate to 2.25% — with more to come
3rd rate hike this year, and more expected
The U.S. Federal Reserve on Wednesday raised its benchmark interest rate for the third time in a year, pushing the upper bound of the widely monitored rate range to 2.25 per cent.
The move was widely expected, as investors who bet on foreign exchange rates were forecasting a 100 per cent chance of a hike in recent days and weeks. But investors nonetheless eagerly parsed the central bank's announcement of the decision to get a glimpse of its line of thinking — and try to deduce how many more hikes are coming and when.
The statement came with a clear signal for investors, one that suggests more hikes are coming. For several decisions in a row, the central bank has included the line "the stance of monetary policy remains accommodative" in its rate decisions. That word, "accommodative," is the bank's way of saying that the baseline of its rate policies was to keep rates comparatively low in order to stimulate the economy.
It's had that language in its rate decisions for the better part of a decade, but Wednesday's announcement removed that line completely — which suggests the Fed is no longer in a mood to keep rates low.
As a press conference after the Fed decision, chair Jerome Powell said that the central bank's monetary policy is indeed getting back to what could be considered "normal."
"Interest rates are going up across a broad range of consumer borrowing," Powell said, while adding that they are "still quite low by historical levels."
The Fed's hike is the third this year and the eighth since late 2015. The announcement and subsequent press conference did nothing to suggest the Fed would be reluctant to move rates higher in future.
"The change in language underlines that the Fed is further along its policy path than other central banks," CIBC foreign exchange analyst Bipan Rai said.
Canada at 1.5%
The U.S. central bank is now forecasting another rate hike in December, three more in 2019 and possibly even one more in 2020. That would put the rate at 3.5 per cent.
For comparison purposes, the Bank of Canada's benchmark interest rate sits at 1.5 per cent, but that is also widely expected to rise next month to 1.75 per cent. And the Bank of Canada is also expected to raise rates in the coming years, but perhaps not quite aggressively as the U.S. will.
"Today's Fed decision is unlikely to shift market expectations around the expected pace of interest rate increases — but should serve to solidify the outlook for two or more hikes in 2019," Karl Schamotta of Cambridge Global Payments said.
The Fed's latest forecast predicts that the U.S. unemployment rate, now 3.9 per cent, will reach 3.7 per cent by the end of this year and then 3.5 per cent next year.
The central bank expects unemployment to begin rising to 3.7 per cent at the end of in 2021. It foresees the economy, as measured by the gross domestic product, growing 3.1 per cent this year before slowing to 2.5 per cent in 2019, two per cent in 2020 and 1.8 per cent in 2021.
Economy could weaken
The Fed sees the economy's long-run growth at a 1.8 per cent annual rate — far below the Trump administration's projections for a sustained rate of three per cent.
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.
Trump's combative trade steps, including the tariffs he's imposed on imported steel and Chinese goods, complicate the Fed's decision-making. Economists worry that the Trump tariffs — and the resulting retaliation from America's trading partners — could weaken the U.S. economy.
The Fed would normally respond to weaker growth by cutting interest rates. But tariffs, which are an import tax, can inflate prices. And the Fed typically counters higher inflation by raising rates.
With files from The Associated Press