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September 27, 2018

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Fed set to modify rates route after possible raise

The US Federal Reserve was set yesterday to raise interest rates for a third time this year and possibly modify the likely direction of rates in the months ahead.

The big question is whether the strong US economy, which has been fueled this year by tax cuts and increased government spending, could weaken next year, especially if President Donald Trump’s trade fights begin to inflict damage and the benefits of tax cuts start to fade.

If the Fed finds that prospect likely, it might signal that it expected to slow its rate increases next year.

The Fed’s key short-term rate — a benchmark for many consumer and business loans — now stands in a range of 1.75 percent to 2 percent after two quarter-point increases in March and June. A similar rate hike yesterday would have risen that range to a still-low 2 percent to 2.25 percent.

Many analysts expect the economy to eventually weaken, in part from the effects of the conflicts Trump has pursued with China, Canada, Europe and other trading partners. If the economy should slow sharply in 2019, the Fed might decide to pull back on its rate increases to avoid hampering growth too much. In that scenario, it might raise rates only twice in 2019 and then retreat to the sidelines to see how the economy fares.

Some analysts, though, say they think the momentum built up from the government’s economic stimulus will keep strengthening the job market and lowering unemployment — at 3.9 percent, already near a 50-year low. A tight job market could accelerate wages and inflation and prod the Fed to keep tightening credit to ensure that the economy doesn’t overheat.

Any light the Fed might shed on those questions could come in the statement it would make after its latest policy meeting ended, in updated economic and rate forecasts it would issue or in a news conference that Chairman Jerome Powell would hold afterward.

The modest rate increase that’s widely expected reflects the continued resilience of the US economy, now in its 10th year of expansion, the second-longest such stretch on record. Most analysts expect the Fed to signal that it plans to raise rates a fourth and final time this year, presumably in December. The Fed’s rate increases typically lead to higher rates on some consumer and business loans.

Should neither Powell nor the Fed clarify expectations for the months ahead, it could be because the policy-makers are sharply divided and are forming into two opposing groups — “hawks” and “doves.”


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