WASHINGTON—The Federal Reserve has raised its key interest rate for the fourth time this year to reflect the U.S. economy’s continued strength but signaled that it expects to slow its rate hikes next year.
The quarter-point increase on Dec. 19, to a range of 2.25 percent to 2.5 percent, lifted the Fed’s benchmark rate to its highest point since 2008. It will mean higher borrowing costs for many consumers and businesses.
The Fed’s move came despite President Donald Trump’s warnings in recent weeks on its rate hikes and on Chairman Jerome Powell. The president has complained that the moves are threatening the economy.
The statement the Fed issued Wednesday after its latest policy meeting said that only “some” further gradual rate increases are likely; previously, it spoke simply of “further gradual increases.” And its new forecast projects two rate hikes next year, down from three the Fed had predicted in September.
U.S. stocks had been up sharply before the Fed’s announcement but began falling soon afterward—and then accelerated into a plunge during Powell’s news conference. The Dow Jones industrial average closed down about 352 points. Investors had apparently hoped that Powell would go further than he did to signal a slowdown in rate increases. But bond prices surged, sending yields lower.
The central bank has raised rates with steady regularity as the U.S. economy has strengthened. Wednesday’s was the Fed’s ninth hike since it began gradually tightening credit three years ago. But a mix of factors—a global slowdown, a U.S.-China trade war, still-mild inflation, stomach-churning drops in stock prices—has led the Fed to consider slowing its rate hikes to avoid weakening the economy too much. It’s now likelier, as Powell said at his news conference, to suit its rate policy to the latest economic data—to become more flexible or, in Fed parlance, “data-dependent.”
Powell acknowledged the shift in the Fed’s strategy.
“We’re going to be letting incoming data inform our thinking about the appropriate path” of future rate increases, he said.
Asked at his news conference whether the Fed’s key rate is near neutral, the chairman said he thinks it’s at the “lower end” of a neutral range.
His comment reinforced the notion that the Fed might be poised to slow or halt its rate hikes to avoid weakening the economy.
For now, most U.S. economic barometers are still showing strength. The unemployment rate is 3.7 percent, a 49-year low. The economy is thought to have grown close to 3 percent this year, its best performance in more than a decade. Consumers, the main driver of the economy, are spending freely.
After the two rates increase that the Fed now envisions for next year, it foresees one final hike by 2020, which would raise its benchmark rate to 3.1 percent. By 2021, four Fed officials envision reversing course and actually cutting rates to help stimulate the economy.
The Fed’s new forecasts also reduce the long-run level for its benchmark rate to 2.8 percent from 3 percent. In doing so, the Fed is signaling that it doesn’t need to tighten credit much further to keep the economy from overheating. Its statement described the economy as strong. But it did note potential threats by adding language to say it would monitor global developments and assess their impact on the economy.
In its updated outlook, the Fed lowered its forecast for growth next year to 2.3 percent from the 2.5 percent it foresaw three months ago. It predicts 2 percent growth in 2020.
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