By Don Lee
Tribune Washington Bureau
WASHINGTON, D.C. — The Federal Reserve, seeing a quickening of economic growth and inflation, announced Wednesday it was raising interest rates for the second time this year — and signaled a faster pace of rate increases in the near term.
The central bank’s decision to nudge up its benchmark short-term interest rate by another quarter point, to a range of 1.75 percent to 2 percent, was widely expected.
That means it would now make it more likely that there will be two more rate hikes this year, instead of one. The new projections reflect policymakers’ view that economic activity and inflation have picked up and are likely to grow a little faster than previously forecast.
The Fed statement released after its two-day meeting said the economy “has been rising at a solid rate,” compared with its assessment in May when policymakers described the economy as advancing moderately.
The Fed saw more robustness in consumer spending of late and said business investment “has continued to grow strongly,” likely boosted by the GOP tax cuts that took effect this year.
The central bank’s updated projections showed that policymakers’ median expectation for economic growth for this year rose a notch to 2.8 percent from its previous forecast in March.
The Fed’s growth forecast for 2019 and 2020 was unchanged, at 2.4 percent and 2 percent, respectively. These figures are still considerably below what Trump administration officials at various times have promised or projected.
In deciding to raise its outlook to four rate hikes this year, and staying with three increases for next year, Fed policymakers appeared to be a little more concerned about rising prices and guard against the risks of an inflationary surge.
The latest government data indicate inflation ticking up recently very close to the Fed’s 2 percent target, which policymakers acknowledged in their statement Wednesday. The Fed’s new projection sees inflation at 2.1 percent, compared with 1.9 percent in its March forecast.
As employers increasingly struggle to find workers — the jobless rate in May matched an 18-year low of 3.8 percent — wages could pick up from their middling pace of recent years. The Fed’s latest projection now sees the unemployment rate dropping to 3.6 percent by the end of this year and dipping to 3.5 percent in the next two years.
Another factor that could add inflationary pressures is the uncertainty over trade. The Trump administration’s move to impose tariffs on steel and aluminum imports already has affected prices paid by construction firms and other metal users, and some of those costs are likely to spill down to consumers.
The central bank did not make a special note of trade in its statement, but Fed Chairman Jerome Powell is expected to discuss the matter in a news conference Wednesday afternoon.
There are rising concerns about trade more generally and the potential risks to the economic outlook. The Fed’s so-called Beige Book, an anecdotal account of business and economic conditions, reported that tariffs and the threat of a trade war with China have begun to affect capital projects and disrupt supply chains.
