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Federal Reserve bumps up interest rate, signals two more hikes likely in 2018

An interest rate hike will affect anyone with a home mortgage, car loan, savings account or money in the stock market. (Video: Daron Taylor/The Washington Post)
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The Federal Reserve hiked the United States' benchmark interest rate a quarter point Wednesday to a range of 1.75 percent to 2 percent, a move that will probably cause a slight increase in mortgage, credit card, auto loan and small-business loan rates.

This hike, which was widely expected, is the Fed's second of 2018, and the central bank signaled it is likely to do two more increases by the end of this year.

The U.S. economy is in "great shape," the Fed indicated, and no longer needs the historically low interest rates that were put in place in the aftermath of the financial crisis to stimulate growth.

“The main takeaway is that the economy is doing very well," Fed Chairman Jerome H. Powell said in a news conference after the announcement. "Most people who want to find jobs are finding them, and unemployment and inflation are low.”

The Fed just made life even worse for home buyers

Unemployment is already at 3.8 percent, the lowest since 2000, and the Fed believes it will fall to 3.6 percent by the end of the year, which would be the best rate since the 1960s.

Powell called it a “puzzle” why wages aren't rising despite such low unemployment and so many companies complaining they can't find enough workers. But he predicted it will get better for most Americans as unemployment continues to drop this year and next.

“You will see wages go up," he said. "You’ll see people at the sort of margins of the labor force having an opportunity to get back into work.”

A minimum-wage worker can’t afford a 2-bedroom apartment anywhere in the U.S.

Many economists worry about a trade war harming growth, especially after President Trump put tariffs on close American allies and many foreign leaders promised to retaliate. But Powell largely dismissed these concerns, arguing there's been no noticeable impact on the overall economy so far.

"Right now, we don't see that in the numbers at all. The economy is very strong, the labor market is strong, growth is strong. We really don't see it in the numbers. It's just not there," he said, although he acknowledged the Fed has heard from some companies that say they might hold off on investments because of trade uncertainty.

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The central bank predicts even higher growth in 2018, another indication Fed officials see little sign of a negative hit from trade. The Fed raised its growth forecast to 2.8 percent, up a small amount from its projection of 2.7 percent annual growth in March. Consumer and business spending remains healthy, the Fed noted, and core inflation is finally expected to hit the central bank's target of 2 percent this year.

The biggest change the Fed made Wednesday was to signal that it intends to do two more rate hikes this year, instead of just one. That puts the Fed on track for four rate hikes total in 2018, something the Fed hasn't done since 2006.

Powell said Wednesday that he would hold a news conference after every Fed policy meeting beginning in January, a change that will enable the Fed to explain its decisions more often and in more depth.

“The statement shows no sign of a pausing Fed, rather one that is increasingly confident in its ability to continue hiking,” said Seth Carpenter, chief U.S. economist at UBS and a former economist at the Fed.

As the economy heats up, the Fed is shifting from an era in which the central bank tried to stimulate the economy to one where it is trying to neither help nor hurt it.

It's a tricky task, experts say. If the Fed raises the rate too quickly, it could prompt businesses and consumers to close their wallets and the economy to slow down or even fall into a recession. But if the Fed raises the rate too slowly, inflation could jump, an equally alarming scenario for markets and businesses.

For now, the Fed is trying to carefully move to that Goldilocks point by signaling it's taking the rate higher at a slow but steady pace.

“We do not want to declare victory,” Powell said at the news conference. “We want to ensure that inflation remains near our symmetric 2 percent longer-run goal on a sustained basis."

Interest rates are now at their highest level since 2008, although they remain lower than the historical average.

The Fed's statement said monetary policy “remains accommodative,” but the central bank scrapped a paragraph that used to appear at the end of its statements saying rates will be low “for some time.”

“Ultimately,” said John Ryding, co-founder of RDQ Economics, “the Fed is signaling that at some point it expects policy to have to become modestly restrictive.”


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