Fed Holds Rates Steady And Signals More Rate Increases Ahead

Gladys Abbott
November 12, 2018

The Federal Reserve is leaving its key policy rate unchanged but signaling that it plans to keep responding to the strong US economy with further rate hikes.

The unanimous decision from the Fed came as anything but a surprise - many anticipate that any hikes will come later in the year during the central bank's December meeting.

In its statement, the Fed is all but sure to announce that it will keep its key rate unchanged in a range of 2 percent to 2.25 percent, the level it reached in September when the Fed raised it for the third time this year. A statement it issued after its latest policy meeting portrayed the economy as robust, with healthy job growth, low unemployment, solid consumer spending and inflation near the Fed's 2 percent target.

Despite a US trade war with key nations, weaker corporate investment and a sluggish housing market, the Fed is showing confidence in the economy's resilience.

The central bank said the September update signaled that one more interest rate increase could occur this year. "All signs point to a rate hike at the December meeting".

Fed policymakers are set to gather in Washington on Wednesday and Thursday.

Policymakers, however, noted that business investment had "moderated from its rapid pace earlier in the year", a possible drag on future economic growth. Analysts will be studying the minutes of this week's meeting, to be released in three weeks, for any insight into economic threats Fed policymakers may see, such as the trade war between the United States and China.

Now, every meeting will be live; and just in time, too, as the Fed signals it is nearing the point when interest rates will be close to "neutral", and may only raise rates a bit farther, or not at all.

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Data released in late October showed the United States economy grew at a 3.5 per cent annual rate in the third quarter, well above the roughly 2 per cent annual growth pace the Fed and many economists regard as the underlying trend.

The U.S. economy looks very strong on nearly every front, the Fed said several times in a statement released Thursday.

"Job gains have been strong, on average, in recent months, and the unemployment rate has declined".

It's left investors wondering whether Fed officials might lower next year's growth forecast when they meet in December, especially given the recent tightening in financial conditions driven by the equity selloff over the past few months.

Notably absent from the statement was any mention of the housing market slowdown or recent stock market jitters.

Since Fed officials met in late September, "the labor market continues to strengthen", the statement read.

Data released in late October showed the USA economy grew at a 3.5 percent annual rate in the third quarter, well above the roughly 2 percent annual growth pace the Fed and many economists regard as the underlying trend. Trump's public criticism has aroused concern that he is intruding on the central bank's long-respected political independence and its need to operate free of outside pressure.

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