An increasingly transparent Federal Reserve lifted interest rates for a third time this year, and did little to discourage expectations for a fourth increase later on in 2018, most likely in December. The latest increase was widely expected and caused nary a ripple on Wall Street.
Specifically, the central bank increased the federal funds rate from a range of 1.75%-2.00% to 2.00%-2.25%. Previous rate hikes had been voted for this year in March and June. In all, this was the eighth such increase since 2015 and continues the pattern of gradually tightening the monetary aggregates.
The bank indicated that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. The arguments for this latest rate action also included the information that household spending and business fixed investment had continued to grow strongly and that inflation had remained near the Fed's target of 2%.
The action just taken reflected the view that realized and expected labor market conditions and inflation were such as to justify this modestly tighter approach. Going forward, the Fed will assess economic conditions and prospects relative to its goal of maximum employment and 2% inflation. We think that will result in several additional rate increases over the next 18 months, or so.
Meanwhile, as the Fed’s decision and statement approached, the Dow had been up about 50 points; it has since about doubled that advance suggesting that the Street remains comfortable with this latest move and the prospect of a fourth rate hike in December. Our thinking is that the economy can handle such further adjustments.
- Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
