Fed raises rates for 3rd time this year with another expected

BP_Federal

"Are they seeing more fiscal policy showing through to aggregate demand than they thought?" said William English, a professor at Yale and former director of the Fed's Division of Monetary Affairs.

Fed Chairman Jerome Powell has so far been circumspect in reflecting on Trump's trade war.

The Fed also dropped the word "accommodative" from the policy statement, released after the two-day meeting, suggesting that the central bank may pause at some point to access impact of rate hikes on the United States economy.

The U.S. central bank is now forecasting another rate hike in December, three more in 2019 and possibly even one more in 2020. In dropping that language, the central bank may be signalling its resolve to keep raising rates. "Most FOMC participants now agree that this makes little sense - the Fed has some catching up to do".

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The Fed sees the economy growing at a faster-than-expected 3.1 percent this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2 percent target.

US President Donald Trump has argued publicly against higher rates, complaining that they would blunt his efforts to boost growth through tax cuts and deregulation.

Markets initially interpreted that move as a sign the Fed may slow the pace of rate hikes in the period ahead as policy settings move to neutral, then restrictive, for economic growth. There's ongoing debate about whether 3 percent (or another number) is the "neutral" or "normal" level of interest rates, meaning that's the rate that doesn't boost or curtail the economy. In August, the president said he was "not thrilled" with Powell, his own appointee, for hiking rates. The Fed has said repeatedly that it views the economy as "strong" right now, but today's forecasts and news conference will likely give more insight into whether the central bank thinks Trump's tax cuts and additional spending are a short-term bounce or something that will have a longer-lasting economic impact.

"We don't consider political factors or things like that", the Fed chief said. That would put the rate at 3.5 per cent.

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"Inflation is at target, the unemployment rate is below target and falling, and yet the funds rate remains 100bp below the Fed's estimate of its neutral level", said Goldman Sachs economists Jan Hatzius and David Mericle in a note published last week.

The jobless rate is now 3.9%.

With risks described as roughly balanced, the statement left the Fed on a steady course for the next year.

This post will be updated when the Fed's statement is released.

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