Federal Reserve officials raised their target interest rate for the third time this year on Wednesday, a move undertaken in the hopes of keeping inflation, a common fear in economies with low unemployment, under control.
The Fed also revised economic growth projections for the year upwards, to 3.1 percent from 2.8 percent, above the goal set by the Trump administration.
The central bank raised the target short-term interest rates by a quarter percentage point, bring it to as high as 2.25 percent, a level not seen since before the worst of the financial crisis in early 2008.
The decision was widely expected, as Federal Reserve Chairman Jerome Powell and other top officials have signaled for weeks that they planned to raise rates. Barring a crisis, the central bank is expect to carry out more increases in short-term interest rates before the end of this year and into next.
During a Wednesday afternoon press conference Powell said he expects unemployment to continue to decline.
“We expect the job market to remain strong,” Powell said, adding that the Fed projects a 3.7 percent unemployment rate later in the year, which it expects to shrink “a bit lower than that in 2019.”
President Trump vocally criticized the Fed for raising rates earlier this year, setting the stage for a potential conflict between the president and the independent economic institution.
“I’m not thrilled because [the economy grows] and every time we go up, they want to raise rates again. I am not happy about it,” said Trump in a July interview with CNBC. He later repeated the sentiment in an interview with Reuters last month.
Criticism of the powerful central bank by presidents is not unprecedented, in part because the Fed enjoys independence from the executive branch of government. But Trump’s remarks are seen as noteworthy due to his trade war with China and other countries, his focus on economic policies, and his general distaste for political norms.
In an interview with Reuters last month Trump said he viewed the Fed, which is tasked with stable prices in the economy and full employment, as undermining his goals in trade.
“We’re negotiating very powerfully and strongly with other nations. We’re going to win,” said Trump. “But during this period of time I should be given some help by the Fed.”
Trump wants a cheap dollar to compete with China’s currency, the yuan, whose low price helps China’s exports, particularly in manufacturing. A weaker dollar might make U.S. exports more affordable for foreign buyers, but it would likely hurt the purchasing power of American families as well.
The president’s increase in U.S. tariffs on foreign goods, which increases the cost of those products for businesses and consumers in the U.S., as well as retaliatory actions from other countries, are expected to drag down economic growth somewhat on their own.
Despite most current economic indicators showing a strong economy, experts worry that a recession could come sooner rather than later, if only due to the nature of business cycles. For the Fed to act in that scenario, interest rates would likely need to be higher than they are now. It’s also unclear how lasting the stimulus of last year’s tax cuts and reform might be.
The Fed’s actions today reflect in part longer-term concern over price inflation, as well as a return to normal as it tries to execute a ‘soft landing’ following years of extraordinary measures brought on by the Great Recession.
Interest rates were kept unusually low for years as a way to help spur economic growth, but central bankers now worry that if they raise rates too quickly, the debt that companies and consumers accrued in the past few years will become unaffordable for them to repay. But economists worry if interest rates continue to remain low more businesses and individuals will accumulate debt, which could strain the financial system if they’re increasingly unable to pay it back.
Wall Street analysts expect two more rate raises before the end of 2018.
