Fed Keeps Rates Unchanged and Signals December Increase Is on Track

Posted November 8, 2018 2:54 p.m. EST

WASHINGTON — The Federal Reserve, as expected, left its benchmark interest rate unchanged Thursday after a two-day meeting of its policymaking committee.

— The Fed said the economy remains in good health. It cited strong growth and the continued decline of the unemployment rate.

— The Fed’s benchmark rate remains between 2 percent and 2.25 percent.

— The Fed is expected to increase that range by a quarter percentage point at its next meeting, scheduled for Dec. 18 and 19.

The Big Picture

The seismic shift in the political landscape Tuesday, as Democrats regained control of the House, is unlikely to matter much for the course of monetary policy. The economy continues to grow, and the Fed has made clear it plans to keep raising rates, slowly but steadily, well into next year.

But this meeting of the Federal Open Market Committee was a place holder: A chance for Fed officials to discuss the latest economic data. The Fed signaled in advance that it didn’t plan to raise rates any sooner than December.

By most measures, the U.S. economy remains in good health. The economy continues to grow at what the Fed called a “strong rate,” expanding at an annual pace of 3.5 percent in the third quarter. And employers added 250,000 jobs in October, dropping the unemployment rate to 3.7 percent.

The economic assessment in the Fed’s post-meeting policy statement contained only two changes from the Fed’s last statement, in September. The Fed noted the decline in the unemployment rate. It also said that business fixed investment “moderated from its rapid pace earlier in the year.”

That leaves the Fed on course to raise rates at its final meeting of the year.

To quote Bank of America’s pre-meeting preview, “See you in December.”

Beyond December

The Fed is currently raising its benchmark rate by a quarter of a percentage point every quarter. At that pace, the rate will reach about 3 percent by the middle of next year. That is roughly the level the Fed regards as neutral, meaning it would neither stimulate nor discourage economic activity.

Some Fed officials are already pressing for the Fed to raise the rate into restrictive territory, arguing that inflation is likely to rise if the central bank does not begin to step on the brakes. A smaller number of officials, however, argue the Fed is moving too quickly. Wage growth is just beginning to increase, raising concerns the Fed will slow the economy as workers are starting to reap real benefits.

Jerome H. Powell, the Fed’s chairman, has said that there is no need to make a judgment until next year.

Powell has described the Fed’s task as a balancing act. On the one hand, he wants to raise rates to keep inflation in check. On the other hand, he is not trying to slow economic growth — at least not yet.

The Trump Effect

Against this balancing act, President Donald Trump has repeatedly attacked the Federal Reserve for raising interest rates too quickly, describing the central bank as “crazy,” “loco,” “going wild” and “out of control.”

Trump’s stated concern is that higher rates will slow economic growth. He also has expressed concern that higher rates will increase the federal government’s borrowing costs.

“Every time we do something great, he raises the interest rates,” Trump complained to The Wall Street Journal, adding that his hand-picked chairman, Powell, “almost looks like he’s happy” to be raising rates.

So far, there is no sign that Trump’s complaints will alter the course of policy. Members of Congress, including some Republicans, have defended the Fed’s independence. And Fed officials have insisted they plan to make policy without regard to the president’s views. “Political pressure will be in no way a consideration in monetary policy decisions,” Richard Clarida, the Fed’s newly confirmed vice chairman, said last month.

More News Ahead

This meeting is a milestone of sorts. It is the last time the Fed plans to conduct a policy meeting without holding a news conference afterward. Powell, a lawyer with a more straightforward speaking style than the economists who have typically run the Fed, plans to take questions from the news media after each of the eight meetings of the Federal Open Market Committee in 2019.

The news conferences, begun under former Fed Chairman Ben Bernanke in 2011, have amplified the role of the Fed’s chairman as an official spokesman, reducing public focus on remarks by other officials. But the Fed quickly fell into a pattern of announcing policy changes at meetings with a news conference, which turned half of the scheduled policy meetings into waiting periods.

Powell’s plan increase his opportunities to speak for the Fed and communicate the rationale behind its approach — and it increases the Fed’s flexibility in determining the timing of future increases in the benchmark rate.