Bloomberg News/Landov Jerome Powell, chairman of the Federal Reserve, isn’t veering from his strategy of raising U.S. interest rates gradually.
The Federal Reserve raised interest rates for the third time this year and signaled it will raise the cost of borrowing again in December, but the central bank also left a hint it could pause at some point to assess how its rate hikes are affecting the economy.
After the end of a two-day meeting, the Fed on Wednesday increased its target for its benchmark lending rate to a range of 2% to 2.25%. Rates are now at their highest level since shortly after the bankruptcy of Lehman Brothers in the fall of 2008.
The decision was unanimous.
See: Fed decision and Powell press conference: Live blog and video
At the same time, senior Fed officials dropped long-standing language saying its stance on interest rates “remains accommodative.”
The unexpected removal of the language would appear to give the Fed more flexibility on how rapidly it raises interest rates next year. The bank, for instance, could move less aggressively than it plans if the U.S. economy falters or other problems emerge.
Some investors saw it as sign the central bank might turn dovish soon, however, and yields on U.S. Treasurys TMUBMUSD10Y, -1.05% initially fell.
“This rate hike is no surprise, but the removal of the signal that policy is still accommodative will raise a few eyebrows,” said James McGann, senior global economist at Aberdeen Standard Investments
Yields recovered a bit later after Powell downplayed the shift during a press conference, saying it just means the Fed’s strategy is working out as planned.
“This change does not signal any change in the likely path of policy,” Powell said. “Policy is still accommodative.”
See: Live blog on Fed Chairman Powell’s press conference.
U.S. stocks SPX, +0.19% DJIA, +0.10% extended gains right after the decision.
The Fed’s overarching goal is to nudge up short-term interest rates to what it considers a “neutral” level that neither supports nor restricts economic growth.
Right now the economy is running hot: Gross domestic product expanded at a robust 4.2% pace in the second quarter, core inflation is near the Fed’s 2% target and an ever-tightening labor market is forcing firms to boost pay and benefits.
Against that backdrop the Fed is prepared to raise rates again before the end of the year.
The Fed’s so-called “dot plot” showed that 12 officials now expect another quarter-point rate hike in December, up from eight officials in the last projections in June. Only four officials now pencil in a pause in December.
The Fed continued to project three rate increases next year and one more in 2020. This would bring rates into what is considered restrictive territory — more than enough to slow the economy.
The bond market has been starting to believe that more rate hikes are coming. Yield on the 10-year Treasury note have risen slowly but steadily over the past month.
The Fed also released a new economic forecast that showed the unemployment rate would start to rise in 2021 as its restrictive policy started to bite.
In the Fed’s forecast, economy growth will gradually decline over the next three years from a 3.1% annual rate this year to a 1.8% rate in 2020 and 2021.
According to the forecast, Inflation will remain contained, with core personal consumption expenditure price index holding steady at 2.1% rate over the forecast period.
