Fed Raises U.S. Interest Rates as Trump Tax Cuts Heat Up Economy
Federal Reserve Chairman Jerome Powell led policymakers in raising rates for the third time since he took over leadership of the central bank earlier this year.

The Federal Reserve raised U.S. interest rates for the third time this year, in a bid to prevent inflation from surging as President Donald Trump's tax cuts fuel economic growth.   

The central bank's monetary-policy committee, led by Chairman Jerome Powell, raised rates by 0.25 percentage point to a range between 2% and 2.25%, according to a statement Wednesday.

In a subtle shift, the panel did not characterize monetary policy as "accommodative," as it had in recent communications -- prompting speculation among some economists that officials may be less aggressive in the future about raising rates. 

But in a press conference, Powell said that the current level of interest rates remains "accommodative" for economic growth, and that officials currently plan to continue borrowing costs at a "gradual" pace.    

"This is a pretty good moment for the U.S. economy," Powell said. "There's good reason to expect that to continue."

The Fed, which cut rates to near zero in the wake of the financial crisis a decade ago, in a bid to stimulate the economy, has been raising them since late 2015 as growth recovered. Trump's $1.5 trillion of tax cuts in December have pushed already-minimal unemployment down even further, most recently to 3.9%, close to an 18-year low. 

On Wednesday, Fed officials increased their median projection for 2018 economic growth to 3.1%, from a 2.8% estimate in June. They still expect the economy to slow next year, to a rate of 2.5%, and then to 2% in 2020. 

The Standard & Poor's 500 Index slipped 0.1% on Wednesday to 2,916. The yield on the 10-year U.S. Treasury note dropped by 0.04 percentage point to 3.06%    

The added stress from the tax cuts on the federal budget -- due to lost Treasury revenue -- has forced the Treasury Department to increase its sales of U.S. government bonds, pushing up yields on the 10-year note above 3%. The Fed's efforts have a more direct impact on short-term rates.   

Higher rates act as a brake on investment and therefore growth, since they push up borrowing costs for consumers and businesses, via mortgages, credit cards and corporate loans.

Most traders and economists predict the Fed will hike rates by another 0.25 percentage-point in December, though they're divided on the likely number of additional increases coming next year.

A pause in the Fed's rate-setting cycle - or an end to it - would follow remarks by Powell in a speech last month that he wanted to avoid "moving too fast and needlessly shortening the expansion." It's a position that's likely to sit well with Trump, who has expressed frustration with the Fed's rate hikes, especially since the economy is likely to be an issue for voters in the November congressional elections.

Powell has said he believes a "gradual" pace of rate hikes is appropriate, based on the latest economic data. 

Many investors have lamented Trump's decision to pursue a trade war with China, since some businesses are already canceling or delaying expansion plans due to the threat of higher tariffs, thus undercutting the economic stimulus from the tax cuts.

Powell, in his press conference, said that Fed officials are hearing "a rising chorus of concerns from businesses all over the country" about the potential damage from Chinese retaliatory tariffs, or from the higher cost of Chinese imports to U.S. consumers.

Even so, the impact so far, according to Powell, is "still relatively small." 

The economy grew 4.2% in the second quarter, the fastest in four years. The unemployment rate is at 3.9%, close to an 18-year low. And wages rose 2.9% from a year earlier in August, the fastest in nine years.

But the fillip from the tax cuts might already be fading. 

Beth Ann Bovino, chief U.S. economist for Standard & Poor's, said in a phone interview that she expects growth to slow to 2.5% in 2019 from an average 3% clip this year.

Inflation, meanwhile, is expected to hold steady over the next few years at 2.2%, she said, not too far above the 2% level targeted by the Fed.

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