By Nick Timiraos
WASHINGTON-The Federal Reserve held short-term interest rates steady Thursday and offered a mostly upbeat assessment of the economy's performance, suggesting another rate increase is likely at its next meeting.
The Fed repeatedly emphasized the economy's strength in a statement released after its two-day policy meeting. It offered nothing to dispel market expectations that it would deliver its fourth interest-rate increase of the year in December.
Data since officials last met in September "indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate," the Fed's rate-setting committee said in a statement Thursday.
The only major change to the statement nodded to a recent pullback in business investment, which officials said had "moderated from its rapid pace earlier in the year."
Officials voted unanimously in September to raise their benchmark rate to a range between 2% and 2.25%. They voted on Thursday to leave it there for now, again with all nine members of the rate-setting committee voting in favor.
Overall U.S. economic output expanded at a 3.5% annual rate in the third quarter after rising at a 4.2% pace in the second quarter, the Commerce Department reported last month. That is roughly double the growth rate Fed officials believe can be sustained over the long run unless the supply of workers or their productivity increases more rapidly.
Meantime, the unemployment rate held at 3.7% in October, a half-century low, and wages rose 3.1% on the year, the biggest year-over-year increase since 2009. A separate gauge of private-sector wage growth that is closely watched by Fed officials rose 3.1% during the third quarter, the most since 2008.
Broad strength in the economy and labor market, powered in recent quarters by solid consumer spending, is more than enough to offset any concerns about some soft spots in the economy.
The housing sector, for example, has cooled this year, with interest rate increases pushing mortgage rates to a seven-year high. That has exacerbated affordability challenges that initially stemmed from low supplies of homes for sale, which pushed up prices rapidly in recent years.
Financial markets have also experienced more volatility. Stocks and bonds sold off last month, with the S&P 500 facing its largest monthly decline in seven years, as investors began to take more seriously the Fed's plans to continue raising rates over the coming year amid solid economic data. The potential of more tariffs have also weighed on the outlook for corporate earnings.
In September, Fed officials penciled in plans to raise their benchmark short-term rate once more this year. Officials are equally split over whether to raise rates two, three or four more times next year. That would push the short-term rate closer to 3%, which is where most officials expect rates to settle out when the economy is at its long-run equilibrium--a so-called neutral level.
One camp of Fed officials says that so long as unemployment keeps falling below the level they project is consistent with stable inflation, which many believe is likely amid continued stimulus from government spending increases and tax cuts, they should raise rates to a level that would restrict growth to prevent the economy from overheating. This is what the Fed has typically done in the later stages of an expansion.
Others have indicated they might support a relatively unusual departure from this stance. They say if inflation doesn't appear to be accelerating beyond the Fed's 2% target, they would be comfortable suspending rate rises earlier than traditional models would dictate.
Fed Chairman Jerome Powell played down the debate last month over whether the Fed would ultimately raise rates above a neutral setting, suggesting it is premature because rates are still boosting growth. Interest rates are "a long way from neutral at this point, probably," he said. "We need interest rates to be gradually, very gradually, moving back toward normal."
The challenge for central bankers is to nudge borrowing costs high enough to prevent an outbreak of inflation or asset bubbles but not to raise rates so high that the economy tips into recession.
So far, tighter financial conditions resulting from the recent stock market selloff appear unlikely to change the Fed's plans. The market pullback received no mention in the Fed's statement, unlike earlier downdrafts in 2015 and 2016.
Some officials have indicated the recent pullback could mollify concerns that low volatility and rising asset values have fueled excessive risk-taking. "While a deeper and more persistent drop in equity markets could dash confidence and lead to a significant pullback in risk-taking and spending, we are far from this scenario," said Cleveland Fed President Loretta Mester in an Oct. 25 speech.
The performance of inflation over the next year will be central to determining how their policy path evolves. Inflation has been holding near the Fed's 2% target for most of this year after undershooting the target for many years. The Fed views inflation around 2% as a sign of balanced supply and demand.
"If we see things getting stronger and stronger, and inflation moving up, then we might move a little quicker," said Mr. Powell last month. "And if we see the economy weakening or inflation moving down, we might move a little more slowly."
One key question is the degree to which higher wages could lead businesses to raise prices.
Tariffs could also result in slightly higher inflation by raising prices of imported goods, though a stronger dollar could offset these effects somewhat by making it cheaper for Americans to buy foreign goods.
This week's Fed meeting was the first since President Trump last month escalated his criticism of the central bank. In an interview with The Wall Street Journal last month, Mr. Trump cited the Fed as the top risk facing the economy. He earlier described the Fed as "crazy" and "out of control" with its plans to gradually lift rates despite few obvious signs of inflation.
Fed officials have stressed that their monetary policy decisions will be made without any consideration of politics.
"We've stayed pretty focused on the facts about the economy," said Randal Quarles, the central bank's vice chairman for bank supervision, in response to a question about Mr. Trump's criticism last month. "The job of the Fed is to remain focused on the facts of the economy and to be independent of the administration."
(END) Dow Jones Newswires
November 08, 2018 14:15 ET (19:15 GMT)
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