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The Journal Gazette

Tuesday, June 12, 2018 1:00 am

Fed expected to raise rate

Will meet Wednesday to decide on second hike of '18

MARTIN CRUTSINGER | Associated Press

WASHINGTON – Another interest rate increase is all but certain when the Federal Reserve meets this week. What's not so sure is whether the vigorous U.S. economy will lead the Fed to accelerate its rate hikes in the months ahead – a move that could raise the risk of a recession.

When it met in May, the Fed left its short-term rate unchanged. But it noted that inflation was edging near its 2 percent target after years of remaining undesirably low. Should inflation eventually pick up, the Fed might move to tighten credit more aggressively. The challenge would be to do so without slowing growth so much as to cause a downturn.

Investors are eagerly awaiting the updated economic forecasts the Fed will issue when its meeting ends Wednesday. Among other things, the forecasts will show whether the policymakers still foresee a total of three rate increases for 2018, as they predicted three months ago, or whether they now envision four. The Fed has so far raised its key rate once this year, in March.

A gradual rise in inflation is coinciding with newfound economic strength. After years in which the economy expanded at roughly a tepid 2 percent annually, growth could top 3 percent this year. Consumer and business spending is powering the economy, in part a result of the tax cut President Donald Trump pushed through Congress last year.

With employers hiring at a solid pace month after month, unemployment has reached 3.8 percent. Not since 1969 has the jobless rate been lower.

The Fed will probably note the economy's strength in the statement it will issue Wednesday. Further clarity could follow, when Chairman Jerome Powell holds his second news conference since succeeding Janet Yellen in February.

Beginning in 2008 in the midst of the financial crisis, the Fed kept its key rate unchanged at a record low near zero for seven years. It then raised rates once in 2015, once in 2016 and three times in 2017. Wednesday's expected quarter-point rate increase will raise the Fed's benchmark rate to a range of 1.75 percent to 2 percent.

Mark Zandi, chief economist at Moody's Analytics, said he thinks stronger growth and rising inflation will lead the Fed to raise rates four times this year and four more in 2019.

“We are going to get a period of rip-roaring growth that is going to push unemployment down to close to 3 percent, a level we have only been at twice in our history,” Zandi said. “That means the Fed is going to have to start stepping harder on the brakes.”