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FEDERAL RESERVE Officials recognize planned rate hikes could slow growth

Friday, July 6, 2018

Associated Press


Federal Reserve officials last month said they expect to keep raising interest rates and suggested by next year, they could be high enough that they could start slowing growth, according to meeting minutes released Thursday.

While highlighting a strong economy, Fed officials appeared vigilant about emerging risks, especially trade tensions, and the dangers of an economy that might overheat. They noted heightened concerns from businesses about President Donald Trump’s get-tough trade policies and that some executives already had scaled back future spending plans because of the uncertainty.

They also were monitoring changes in market-set interest rates. A narrowing in the gap between short-and long-term rates has been an accurate predictor of downturns in the past.

Economists said the discussions did not alter their overall view of what the Fed would do this year.

“We continue to expect fiscal stimulus will push the unemployment rate lower over time and lead the Fed to hike rates two more times this year, in September and December,” said Barclays economist Michael Gapin.

The minutes covered the discussions at the Fed’s June 12-13 meeting in which the central bank boosted its key rate for a second time this year to a new range of 1.75 percent to 2 percent. Fed officials increased their projection for the number of rate hikes planned this year from three to four, and dropped language used for years promising to keep rates at levels that would boost economic growth “for some time” because it “was no longer appropriate in light of the strong state of the economy and the current expected path for policy,” the minutes said.

Officials discussed that under their expected path, its key policy rate – the federal funds rate – could be at or above neutral, the point at which the rate is neither stimulating or holding back economic growth.

In its latest projection, the neutral rate stood at 2.9 percent. But it forecast a higher benchmark rate of 3.1 percent by the end of next year. Projections have the funds rate rising to 3.4 percent by the end of 2020.

As such, a number of officials believed it might soon be appropriate to drop the language in the policy statement indicating the stance of monetary policy “remains accommodative,” the phrase used to say rates are still low enough to stimulate growth.

Despite current growth prospects and inflation reaching the Fed’s goal of 2 percent annual gains in prices, the minutes noted a number of “risks and uncertainties” to the economy, saying the risks associated with trade policy had “intensified,” with the uncertainty potentially hurting business sentiment and investment spending.”

The Trump administration has imposed tariffs on steel and aluminum imports. He has also threatened to impose tariffs on billions of dollars in other Chinese products, including tariffs on $34 billion in Chinese goods which are scheduled to take effect on Friday. Beijing has promised to retaliate with tariffs on U.S. goods, including farm products such as soybeans.

Trump has staked out a tougher approach on trade in an effort to achieve his goal of dramatically shrinking America’s huge trade deficits, which he has blamed for the loss of millions of U.S. factory jobs.