Fed boosts interest rates but softens 2019 plans

The economic outlook hasn't been quite as rosy lately, and so the Fed is stepping back just a bit.

The Federal Reserve raised its key interest rate Wednesday for a fourth time this year but lowered its forecast to two hikes in 2019 amid the recent stock market sell-off and uncertain growth prospects.

"The economy has continued to perform well," Fed Chairman Jerome Powell said at a news conference. But, he added, "We have seen developments that may signal some softening … In early 2018, we saw a rising trajectory for growth. Today, we see growth moderating ahead."

The central bank's latest move, which comes amid President Donald Trump's repeated criticism of Fed rate hikes, is expected to set off a domino effect across the economy, bumping up rates on credit cards, home equity lines of credit and adjustable-rate mortgages.

As expected, the Fed raised the federal funds rate – which is what banks charge each other for overnight loans – by a quarter point to a range of 2.25 to 2.5 percent. It marked the central bank's ninth hike since late 2015.

But in a statement after a two-day meeting, the Fed acknowledged a slowdown in global economic growth, the stock market's plunge and a strong dollar that's making U.S. exports more expensive for overseas customers.

The Fed "will continue to monitor global economic and financial developments and assess their implications for the economic outlook," the statement said.

Fed officials also indicated they foresee fewer rate hikes next year, estimating that only "some gradual increases" will be warranted.

The wording change reflects a central bank that now intends to respond in real time to the course the economy takes rather than follow a rate-hike road map as it has the past couple of years.

"Weaker-than-expected data, both in the United States and/or in major foreign economies, could derail further rate hikes, at least for the foreseeable future," Wells Fargo economist Jay Bryson wrote in a note to clients.

Despite the Fed's market-friendly expectation for fewer rate hikes, the Dow Jones Industrial Average fell 352 points, or 1.5 percent, sinking to its lowest point of the year. That's partly because Powell passed on opportunities to paint a gloomier picture of the economy that would spell even fewer rate increases, Contingent Macro Research wrote to clients.

Fed officials are grappling with conflicting forces. On the one hand, the unemployment rate has fallen to a 49-year low of 3.7 percent – traditionally a signal of faster wage growth and inflation.

At the same time, federal tax cuts and spending increases that juiced economic growth this year are set to begin fading in 2019. The Trump administration's trade war with China is likely to take a bigger toll on the economy. And the Fed rate hikes themselves are expected to more substantially curtail consumer and business borrowing.

Largely as a result, the stock market has trended sharply lower in recent weeks, with the Dow off more than 10percent from its early October peak. Meanwhile, the dollar has strengthened amid a weakening global economy, making U.S. goods more expensive overseas and hurting American manufacturers.

The upshot: an economy that could weaken moderately next year, keeping inflation contained and raising the risk that an aggressive Fed might tip it into recession.

Trump has taken the highly unusual step of repeatedly criticizing Powell in recent months for hiking rates, saying the strategy has impeded the faster economic growth he has promised.

"Political comments have played no role whatsoever in our decisions or discussions on monetary policy," Powell said Wednesday, noting the Fed is an independent agency.

How fast rates will rise

The Fed cut its forecast from three hikes next year to two. Amid the uncertain economy, markets have anticipated just one rate increase in 2019.

Fed officials expect the key rate to rise to 2.9 percent at the end of 2019, and 3.1 percent at the end of 2020, down from 3.1 percent and 3.4 percent, respectively, in their September projection.

Economy

The Fed said "economic activity has been rising at a strong rate."

The Fed estimates the economy will grow 3 percent in 2018, down from its prior estimate of 3.1 percent, and 2.3 percent in 2019, below its previous 2.5 percent forecast.

The economy grew 4.2 percent and 3.5 percent in the third and fourth quarters, its best six-month stretch since 2014.

Jobs

"The labor market has continued to strengthen," the Fed said, adding that "job gains have been strong, on average, in recent months."

The Fed left its estimate of the unemployment rate at the end of this year unchanged at 3.7 percent. But it slightly raised its forecast for the rate at the end of 2020 to 3.6 percent.

As firms compete for fewer workers, annual wage gains have picked up to a nine-year high of 3.1 percent in recent months.

Inflation

With the economy expected to slow a bit, the Fed slightly lowered its inflation forecast.

It expects annual inflation to dip from 2 percent to 1.9 percent at the end of 2018 and stay at that level by the end of next year.

It predicts a core measure that strips out volatile food and energy items will rise from 1.8 percent to 1.9 percent by the end of this year and 2 percent by the end of 2019.

Many economists expect consumer price increases to stay contained as a result of cheap oil and gasoline and long-term forces such as discounted online shopping.

"I do think (low inflation) gives the committee the ability to be patient going forward" as it considers further rate increases, Powell said.

What it means

The Fed is acknowledging recent developments that have tempered its economic forecast, including the slowdown in global growth, market volatility and the strong dollar.

While Fed policymakers largely maintained an upbeat outlook, they modestly reined in their expectations for the economy and the pace of rate hikes.

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