The Fed raise short-term interest rates, as anticipated, by another quarter percentage point to a range between 2% and 2.25%, signaling it expects a fourth hike in December as well as three more in 2019 and one in 2020.
“These rates remain low,” Fed Chairman Jerome Powell said in a news conference. “This gradual return to normal is helping to sustain this strong economy for the longer-run benefit of all Americans.”
The hike drew criticism from Trump. “I’m not happy about that,” he said at a press conference in New York. “I’d rather pay down debt or do other things, create more jobs, so I’m worried about the fact that they seem to like raising interest rates. We can do other things with the money.”
The latest hike is the third in the year and the eight since the Fed began to increase rates in late 2015 after they were close to zero after the 2008 financial crisis.
This is also the first time that the rates have been raised above 2%—and above inflation— since 2008.
Powell said the decision was guided by economic theory and evidence rather than politics. “That’s who we are. That’s what we do. And that’s just the way it’s always going to be for us.”
Projections for the next three years
The Fed projects that US the economy will grow 2.5% next year before slowing 2% in 2020 and 1.8% in 2021, as the impact of recent tax cuts and government spending fade.
Inflation was estimated to hover near 2% over the next three years, while the unemployment rate is expected to fall to 3.5 percent next year and remain the same through 2020 before rising slightly in 2021. The current unemployment rate in the US is 3.9%.
More headwinds as the US moves into 2019
While a recent Bloomberg survey also suggests that analysts favor a 25bp rate hike in each of the first three quarters of 2019, James Knightley, chief international economist at ING said the market is only really pricing in one hike next year.
"While the economy is strong is 2018, the outlook is more clouded for 2019," he said. "We are in the middle favoring two—one in 1Q19 and one in 3Q19.”
The support from this year’s massive fiscal stimulus will gradually fade while tighter financial conditions in the form of higher US borrowing costs and the stronger dollar will also act as a brake on growth, he said.
“Then there is the gradual drag from trade tensions that will impact supply chains and put up the cost of doing business, while emerging market weakness could start to exert more of a drag on global and US activity,” Knightley noted.
This should help to dampen inflation pressures in the medium term, he added.
“The caveat is that if these external tensions ease then we would be willing to raise our forecast to three 25 basis point rate rises in 2019,” Knightly said.