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Federal funds rate ticks up on a strong economy

The federal funds rate picked up another quarter point on Wednesday, September 26, as the Federal Open Market Committee  unanimously approved its third increase of the year to a range between 2% and 2.25%. In a statement released last Wednesday, data reviewed by the Committee indicates a strengthening labor market and economic activity rising at a strong rate since the last Federal Open Market Committee met in August. Strong job gains, a low jobless rate, and strong household and fixed investment were factors taken into consideration. Inflation remains near 2 percent and indicators of long-term inflation expectations remain steady.

However, it may not be the last rate hike of 2018. Officials indicate one more increase before the end of the year as officials strive to keep the strong economy on course (see What moved the markets).

What they said

Nick Timiraos writing for the Wall Street Journal reported Fed Chairman Jerome Powell said in a news conference following the Committee announcement that, “Our economy is strong,” and “The overall growth outlook remains favorable.”

Each up-tick in the federal funds rates raises borrowing costs for businesses and consumers, which could slow corporate spending and housing demand. However, rates remain low and businesses and consumers continue to benefit from tax reform and a strong labor market.

Projecting forward

Growth projections overall remain favorable, as seen in the Economic Projections (PDF) issued by the Fed below. Fed officials estimate:

• Gross domestic product to rise 3.1% this year and is forecasted to be 2.5% for 2019
• The jobless rate of 3.7% this year is expected to dip slightly next year to 3.5%
• Inflation of 2.1% this year is expected to settle down to the Fed’s target of 2% in 2019

Labor market conditions, inflation rates, and financial and international developments are impacted whether short-term rates inch higher. But longer-term, CNBC reports that officials see federal funds rates rising three times in 2020 and another in 2021 before settling back down to 3% over the long run. Please contact us if you have any questions. We will keep you posted.

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