The Federal Reserve kept interest rates unchanged Wednesday but hinted that more rate hikes are probably coming later this year if the economy continues to strengthen.
“The labor market has continued to strengthen and ... economic activity has been rising at a moderate rate,” the central bank wrote in a statement Wednesday.
For 2018, the Fed predicts the U.S. economy will keep expanding at a “moderate” pace, hiring will remain strong, and inflation will “run near” the central bank's 2 percent target, a notable change after years of low inflation.
U.S. interest rates are at 1.5 percent to 1.75 percent, the highest in a decade. As rates rise, Americans feel it because their credit card rates also climb, as do the rate for mortgages, auto loans and small business loans. But interest rates are still at a very low level, compared with where they were during much of the 1990s and early 2000s, when interest rates exceeding 4 percent were common.
The Fed, under the leadership of new chair Jerome H. Powell, faces a tricky path ahead, as the central bank wants to encourage growth but not trigger a recession. The economy and inflation are heating up because of a global upswing and President Trump's tax cuts. But the bump is expected to be short-lived. The Fed forecasts a spike in growth in 2018 that will fall back to normal by 2020.
On top of that, the stock market is whipsawing this year as many on Wall Street are uncertain whether this is “as good as it gets” for the economy and that a slowdown, and possible recession, might follow in the years ahead.
“We see a rising risk of a recession in 2019,” economist Paul Ashworth of Capital Economics said.
Trump is also threatening a trade war with China and other nations. If the administration enacts more tariffs on foreign goods coming into the United States, it's likely to hurt the economy by causing businesses to pull back on some investments and forcing Americans to pay even higher prices for some items. So far, the tariffs are mostly threats, but the Fed has warned that a trade war or even a skirmish could curtail growth.
For now, the Fed predicts rosier times ahead for the U.S. economy, with more Americans likely to get jobs and possibly even higher pay as companies struggle to find and keep good workers. The statement noted that inflation has “moved close” to the central bank's target and is likely to stay around 2 percent for the coming year, a potential signal that the Fed is likely to hike rates at its next meeting in June.
“The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate,” the Fed wrote in a statement that was little changed from its last announcement in March, except for comments about closing in on the inflation target.
The Fed predicts it will raise rates at least two more times this year. Many on Wall Street think the economy is accelerating so quickly that the Fed will have to hike rates three more times in 2018 to keep the economy from overheating. Inflation is a growing concern as businesses are starting to raise prices. The subscription price for Amazon Prime, for example, is jumping 20 percent to $119 a year starting May 11, and gas, rent and food prices are inching up.
“At some point in the year ahead, the [Fed] may have to provide some more clarity about whether it actually intends to lift the federal funds rate to a “restrictive” level by the end of next year,” Ryan Wang, U.S. economist at HSBC, wrote in a research note Wednesday.