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Fed hikes rates at December meeting


Federal Reserve policymakers voted to raise interest rates for the fourth time in 2018 at their December meeting, but signaled they will be less aggressive next year, with likely just two rate increases for all of 2019. 

The federal funds rate will be boosted by a quarter of percentage point to a target range of 2.25 percent to 2.5 percent. The Federal Open Market Committee (FOMC) was unanimous in voting for the increase, despite facing critical tweets from President Donald Trump.

fedreserFed Chair Jerome Powell told reporters that FOMC committee members expect to make just two rate increases in 2019, down from three. Powell has recently softened his comments on future rate hikes, indicating weeks ago that the Fed may be less aggressive in 2019.

Powell said a rate increase was appropriate because economic growth projections are strong, in the range of 2 percent to 2.5 percent in 2019, and the unemployment rate could fall even lower next year. He said the difference between this year and next is that the economy is slowing down. 

"Today, we see a growth moderating ahead," Powell said. He said inflation is still running slightly below the target, giving the committee the room to be patient next year. In terms of unemployment and gross domestic product (GDP) growth, Powell said "2018 has been the strongest year since the financial crisis."  

Trump tweeted on Monday that "it is incredible" the Fed was considering another rate interest, given "a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down." On Tuesday, Trump tweeted they should "feel the market, don't just go by meaningless numbers."

The stock market didn't react well to Powell's comments indicating further rate increases next year. The Dow Jones Industrial Average declined 352 points on Wednesday, finishing the day at a low for the year. The Dow is on track for its worst December since 1980, according to MarketWatch. 

Powell denied that Trump's criticism of the Fed has influenced the policymakers.

"Nothing will deter us from doing what we think is the right thing to do," Powell said.  

Some economists were already predicting just two more rate increases in 2019. 

Reacting to a noticeable slowdown in global growth, which has resulted in a substantial increase in financial market volatility, the Federal Reserve has changed its tune with respect to the future path of hikes for the federal funds rate," Mortgage Bankers Association Chief Economist Mike Fratantoni said. "As highlighted in recent public remarks, Chairman Powell and the FOMC believe that the fed funds rate is now quite close to the neutral level – the level which would keep the economy at full employment and stable inflation." 


 

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