The Economy

Fed Raises Benchmark Rate from 2.25% to 2.5%

Fed chair Jerome Powell calls the move "appropriate for what is a very healthy economy," but financial markets don't seem to share his confidence.
Matthew HellerDecember 20, 2018
Fed Raises Benchmark Rate from 2.25% to 2.5%

The U.S. Federal Reserve raised the benchmark interest rate for the fourth time this year but its continued confidence in the U.S. economy did little to calm skittish financial markets.

With Wednesday’s hike, the federal funds rate will now sit in a range from 2.25% to 2.5%, bordering the lower end of what Fed officials consider the neutral zone in which rates would neither stimulate nor restrain the economy.

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The hike came despite President Donald Trump’s attacks on the Fed’s monetary policy and investor concerns that the economy is softening. On news of the latest increase, stocks that had been up earlier in the day turned sharply lower, ending down 352 points, or 1.5%.

At a news conference, Fed chairman Jerome Powell said the move “was appropriate for what is a very healthy economy.”

“Over the past year, the economy has been growing at a strong pace, the unemployment rate has been near record lows and inflation has been low and stable,” he said. “All of those things remain true today.”

Fed officials did indicate the pace of rate hikes will slow, with a majority predicting on Wednesday that the central bank would raise rates no more than twice next year. But the day’s Wall Street drop indicated a disconnect over the economy’s health.

“Implicit in what’s been happening [in stock markets] is a much softer economy than the Fed is forecasting,” Carl Tannenbaum, an economist at financial services firm Northern Trust, told the Los Angeles Times.

Ryan Sweet, who covers the Fed for Moody’s Analytics, noted financial markets are clinging to an unrealistic expectation for zero rate hikes next year. “Markets are being a little bit disconnected with the economy,” he said. “The economy is slowing, but there’s no indication of a sharp slowdown or that recession risks are appreciably higher than a few weeks ago.”