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Federal Reserve raises rates despite signs of economic softening

The Federal Reserve raised interest rates Wednesday for the fourth time this year, but signaled a more patie...

Posted: Dec 20, 2018 12:36 PM
Updated: Dec 20, 2018 12:36 PM

The Federal Reserve raised interest rates Wednesday for the fourth time this year, but signaled a more patient approach raising rates next year amid signs that the economy is starting to weaken.

Central bankers unanimously agreed under Chairman Jerome Powell to lift the federal funds rate, which controls the cost of mortgages, credit cards and other borrowing to a range of 2.25% and 2.5%.

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At their final two-day policy-setting meeting in Washington, policymakers said they might not need to raise rates as quickly next year as they previously thought.

"Despite this robust economic backdrop and our expectation for healthy growth, we have seen developments that may signal some softening," Powell told reporters at a press conference.

The Fed chairman said there were a number of "cross-currents emerging" that prompted most officials to "modestly" lower their growth forecasts next year.

He added that officials "now think it is more likely the economy will grow in a way that calls for two rate increases next year" -- fewer than initially expected.

In their statement, policymakers made clear they are attuned to global and financial headwinds facing the US economy, and said they would continue to monitor developments and the impact on their outlook going forward.

The decision by the Fed comes after an unprecedented public pressure campaign by Trump.

On Tuesday, as officials gathered in Washington for the start of their two-day meeting, President Donald Trump urged the Fed to move cautiously "before they make another mistake."

Interest rates have gone up seven times since Trump took office. Four of those increases have been under Powell.

The president's repeated remarks have put his Fed chairman in an awkward position amid signs of economic softening and weeks of market volatility that have shaken the broad consensus that rates must go up.

Any deviation from that plan going forward could be read as a sign of Powell caving to Trump and spark a wild selloff by stoking concerns that even the Fed thinks the economy is turning south.

When asked about pressure from the White House, Powell said "We're going to do our jobs the way we've always done them," stressing the importance of the Fed's independence from political pressure. "Nothing will cause us to deviate from that."

Central bankers are now wrestling with tighter financial conditions -- mainly reflecting a stock selloff -- which has increased the odds of growth slowing next year. Fed officials slightly marked down their growth forecast for this year and 2019, dropping to 3% and 2.3%, respectively. They had previously predicted economic growth to be 3.1% and 2.5% for 2018 and 2019.

When asked about how he views recent market volatility, he said his focus is what's happening in the broader macroeconomy.

"We follow markets carefully but remember, from a macroeconomic standpoint, no one market is the single dominant indicator," he said.

The Fed also on Wednesday sent a dovish signal to investors, lowering their projections of how many rates they expect next year in their so-called "dot plot." The central bank now appears to be eyeing at least two more rate hikes in 2019. Only six FOMC participants expect there could be as many as three.

"We know that the economy may not be as kind to our forecasts next year as it was this year," Powell said.

In September, nine of the 16 policy makers forecast the Fed should raise rates three or more times next year, while seven officials estimated the economy would benefit from two hikes or less.

Powell has repeatedly tried to advise investors not to read too deeply into the Fed's economic forecasts, saying policymakers often don't have the ability to see that far into the future and decisions are formed based on data from markets, the economy and business contacts.

The US central bank has been trying to strike a balance between not moving too fast and risking shortening the economy's longest running expansion versus not moving too slowly and risking the economy overheating.

Instead, it has signaled a shift toward "data dependence," meaning going forward it will only become less clear just how fast the Fed plans to raise rates to keep the US economy from wobbling.

Even so, policy makers didn't go as far as expected in removing a commitment to gradually continue to raise rates next year -- a move the market anticipated could have come as early as December.

At their last meeting in November, Fed officials suggested potentially changing their post-meeting statement to remove mention of "further gradual increases" and reflecting their plans to rely more greatly on fresh economic data.

The potential pivot by the Fed prompted one Wall Street analyst, Goldman Sachs' chief US economist Jan Hatzius, to declare ahead of the meeting in a note to clients: "The end of gradual."

Indiana Coronavirus Cases

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Cases: 611039

Reported Deaths: 9716
CountyCasesDeaths
Marion844351336
Lake45508685
Allen32891552
Hamilton29546315
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Elkhart24440345
Vanderburgh19513250
Tippecanoe18043140
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Ohio Coronavirus Cases

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Cases: 864322

Reported Deaths: 10711
CountyCasesDeaths
Franklin101705707
Cuyahoga860661145
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Summit35063761
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Butler31128232
Stark25933435
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Licking13274137
Fairfield1287781
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Medina11666168
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Wood10407158
Allen9945126
Portage9382109
Miami921073
Richland9186118
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Tuscarawas7410182
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Pickaway728450
Wayne7080171
Muskingum705241
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Hancock554390
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Scioto541664
Geauga513555
Darke471092
Lawrence457958
Ashtabula454673
Union454628
Sandusky438562
Mercer434489
Seneca431566
Huron430041
Auglaize423064
Shelby421922
Jefferson420569
Belmont417740
Washington391840
Athens38129
Putnam376275
Madison356529
Knox354422
Ashland347438
Fulton339343
Defiance332286
Crawford323874
Preble321437
Brown313921
Logan309132
Ottawa294943
Clinton290743
Williams279467
Highland276718
Jackson265345
Guernsey256326
Champaign252628
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Perry232018
Holmes225674
Henry220149
Hardin214033
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Van Wert202645
Gallia198826
Wyandot196151
Pike177417
Adams176915
Hocking172624
Carroll156216
Paulding144721
Noble120740
Meigs109024
Monroe101032
Harrison89421
Morgan83430
Vinton70813
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