Fed hikes its key interest rate again and boosts next year's economic growth forecast - Los Angeles Times
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Fed hikes its key interest rate again and boosts next year’s economic growth forecast

Federal Reserve Chairwoman Janet L. Yellen laughs Wednesday during her final news conference as central bank chief in Washington, D.C.
Federal Reserve Chairwoman Janet L. Yellen laughs Wednesday during her final news conference as central bank chief in Washington, D.C.
(Alex Wong / Getty Images)
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Federal Reserve monetary policymakers on Wednesday nudged up their key interest rate again and increased their forecast for the economy’s performance in 2018 as Congress neared passage of a large tax cut package.

Fed officials forecast 2.5% growth next year with an increase in consumer spending and business investment expected from the lower taxes, with growth declining in subsequent years and running below 2% in the longer run.

That short-term boost would fall short of President Trump’s promise Wednesday of “a new economic miracle,” prompted by the tax overhaul, which he contended would result in annual growth of 4% or more.

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“That’s something that would be very, very welcome but it would be challenging to achieve numbers like that,” Fed Chairwoman Janet L. Yellen said at her last news conference as the central bank’s leader before she steps down in February.

Still, she said, the economy was strong enough for another rate hike.

“At the moment, the U.S. economy is performing well,” Yellen said. “There’s less to lose sleep about now than there’s been for quite some time.”

Fed officials voted 7-2 after a two-day meeting to increase the rate by a quarter of a percentage point to a target range between 1.25% and 1.5%.

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The move was opposed by two regional Fed bank presidents, Neel Kashkari of Minneapolis and Charles L. Evans of Chicago, who preferred not to increase the short-term federal funds rate. The rate is a benchmark for consumer and business lending.

The Fed now has raised the interest rate a full percentage point over the last year, in line with its forecasts and analyst expectations.

By itself, Wednesday’s small hike will have little effect on consumers’ pocketbooks. But the cumulative effect of rate increases over the last two years will pinch households, especially those with large credit card balances or home-equity loans.

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“Insulate yourself from further rate hikes,” advised Greg McBride, chief financial analyst at Bankrate.com. “Pay down or pay off variable-rate debt; grab the zero-rate balance transfer offers still out there; and refinance your adjustable-rate mortgage into a fixed rate.”

The two dissenting votes on the rate increase “are a reflection of the Fed’s struggle to understand where inflation is going,” said Carl Tannenbaum, chief economist at Northern Trust in Chicago.

The inflation rate has persistently been below the Fed’s 2% target, despite expectations that it would rise as economic growth has picked up a bit and the unemployment rate has dropped to just a little above 4% in recent months.

Unusually low inflation could be a signal of an underlying weakness in the economy, and if that trend continues next year, it could cause further division within the Fed.

Yellen stuck by her assessment that inflation has been held down primarily by temporary factors and that it was likely to move up to about 2% in the next couple of years.

She added, however, that the Fed would carefully monitor inflation, especially given the “surprising softness” in recent data — and even more uncertainty in the outlook that would be injected if the Republican tax cuts are enacted, as expected.

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Yellen said that policymakers considered the pending tax overhaul in making their economic forecasts. But while the tax cuts and other changes “will likely provide some lift to economic growth in coming years,” she emphasized that there was “much uncertainty” about the extent and timing of those effects.

Despite boosting their estimate of economic growth next year to 2.5% from 2.1% in September, central bank officials held to their expectations of three additional quarter-percentage-point rate hikes next year. That was because they forecast inflation won’t hit the central bank’s annual 2% target until 2019.

Stocks on Wall Street rose after the release of the Fed decision. Investors cheered the stronger growth forecast coupled with the news that policymakers did not indicate that a faster pace of rate increases is likely for next year, as some analysts thought might happen.

Asked about soaring stock prices, Yellen said it was difficult to know whether the “elevated” valuations were at worrisome levels. “When we look at other indicators of financial stability risk, there is nothing flashing red there, or even orange,” she said.

Nor did Yellen seem terribly concerned about the surge in prices of bitcoin. She described the crypto-currency as “not a stable source of value” and “a highly speculative asset,” but she regarded the risks to the financial system as limited.

“Undoubtedly there are individuals who could lose a lot of money,” she said, “but I really don’t see that as creating a full-blown financial stability risk.”

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The Fed’s forecast for this year’s economic growth also is 2.5%, a slight upgrade from the 2.4% estimate in September. In their policy statement Wednesday, members of the rate-setting Federal Open Market Committee said that “economic activity has been rising at a solid rate.”

Longer term, Fed officials expect U.S. economic growth — part of an expansion already 8 1/2 years old — to slip to 2.1% in 2019 and fall under 2% in the longer run, well below White House predictions of at least 3% growth in coming years.

Policymakers said that job gains have been solid since they met last month after taking into account some fluctuations caused by recent severe hurricanes. Fed officials forecast the unemployment rate would drop to 3.9% next year, below their September estimate of 4.1%.

The acceleration in rate hikes over the last year came as the economic recovery has strengthened somewhat following a long period of sluggish growth. Fed officials had pushed the rate down to near zero in December 2008 in an effort to boost growth in the wake of the financial crisis and Great Recession.

They kept the rate at that unprecedented low level until December 2015, when they nudged it for the first time in nearly a decade.

Yellen will preside over one more Federal Open Market Committee meeting next month.

After a lengthy search, President Trump decided in October against renominating Yellen, a Democrat, for a second four-year term as Fed chairwoman. Trump tapped Jerome H. Powell, a Republican who has served as a Fed governor since 2012.

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Yellen, an emeritus professor at UC Berkeley, said she has no definitive plans after the Fed. She expects to maintain her home at Berkeley but retain a base in Washington, where her husband, George Akerlof, is a professor at Georgetown University.

“It’s been an immensely rewarding experience for me,” said Yellen, the first woman to lead the Fed. “I feel very positive about what we’ve been able to accomplish.”

Powell’s nomination was approved 22-1 last week by the Senate Banking Committee, and he is expected to be confirmed by the full Senate before Yellen’s term as chairwoman ends Feb. 3.

A former Treasury official with extensive Washington experience, Powell has supported Yellen’s approach of gradually raising the Fed’s key interest rate and to start slowly reducing the trillions of dollars in bonds it bought to stimulate the economy during and after the Great Recession.

But Powell is expected to be more open than Yellen to easing financial regulations.

[email protected]

Twitter: @JimPuzzanghera

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UPDATES:

3:20 p.m.: This article was updated with additional comments from Yellen and Greg McBride, chief financial analyst at Bankrate.com

1:15 p.m.: This article was updated with additional comments from Yellen on the rise in the stock market and bitcoin.

Noon: This article was updated with comments from Fed Chairwoman Janet L. Yellen and Carl Tannenbaum, chief economist at Northern Trust in Chicago.

This article was originally published at 11 a.m.

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