Fed Expects to Keep Raising Rates, Ending Years of Stimulus


An eagle statue stands on the facade of the Federal Reserve building in Washington. The central bank has risen its benchmark interest rate twice this year, including at its last meeting in June. Its next policy meeting is July 31-Aug. 1.

An eagle statue stands on the facade of the Federal Reserve building in Washington. The central bank has risen its benchmark interest rate twice this year, including at its last meeting in June. Its next policy meeting is July 31-Aug. 1.


Andrew Harrer/Bloomberg News


WASHINGTON—Federal Reserve officials at their meeting last month signaled they could raise interest rates over the next year to a level that no longer seeks to stimulate growth, formally ending a long postcrisis chapter in which the central bank unleashed unprecedented stimulus campaigns.

In a sign of the economy’s shifting fortunes, officials intensified their discussions over how to manage rates if growth accelerates so rapidly that bubbles or unsustainable price pressures emerge, according to the minutes of the Fed’s June 12-13 meeting, which were released Thursday.

“Some participants raised the concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economy downturn,” the minutes said.

The Fed raised its benchmark federal-funds rate at the June meeting by a quarter percentage point to a range between 1.75% and 2%, the second such rate increase this year. Most of the officials penciled in a total of at least four rate increases this year, up from three rate increases in forecasts released in March.

The discussions last month reflected how the economy’s recent strength has moved the Fed to a point at which it could soon seek to cool growth.

“Participants generally judged that…it would likely to be appropriate to continue gradually raising the target rate for the federal-funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020,” according to the minutes released Thursday.

The minutes framed the big questions shaping policy over the next few years: Officials must determine the neutral setting for the fed-funds rate—the level that neither spurs nor slows growth—now that they expect the economy to grow faster than is sustainable over the long run. Then they must decide how much to push rates above neutral to slow growth and prevent the economy from overheating.

In June, officials dropped language from their postmeeting statement that for years signaled the Fed’s view that rates would continue to remain below neutral. A number of Fed officials said that with future rate increases, it soon would be necessary to modify additional language in the statement that describes monetary policy as “accommodative,” or stimulating growth, according to the minutes.

The minutes also reveal growing unease with how trade policy could hold back business investment and weaken economic growth relative to officials’ forecasts for a sustained upturn in investment, demand and output this year and next.


Donald Trump

is in the process of increasing tariffs and other penalties against major trading partners, which could fuel uncertainty among U.S. businesses that rely on global suppliers and markets for their goods and services. A new round of tariffs against China, for example, is set to take effect Friday.

A slowdown in trade could hinder business confidence, weigh on financial markets and reverse a recent synchronized upturn in global growth. The minutes said some businesses contacts have scaled back or shelved plans for new investments in the face of uncertain trade policy changes.

“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes said.

Contacts in the steel and aluminum industries, where the U.S. has already imposed tariffs, haven’t resulted in “any new investments” to boost domestic production capacity, officials said at the June meeting.

Officials flagged other international risks to growth, including from turbulence that has hit some emerging markets as the dollar strengthens and from political turmoil that could weigh on investment sentiment in Europe.

Still, concerns over trade and a potential weakening in global growth don’t appear to have shaken the Fed from its view that more rate increases will be needed to keep the economy on an even keel.

Fiscal policy is one reason why. Tax cuts and government spending increases approved late last year and earlier this year are expected to stimulate growth and push the unemployment rate to half-century lows. The unemployment rate dropped to 3.8% in May, matching its lowest level in 18 years. It hasn’t been lower since 1969.

Most officials still believe in a framework that sees an inverse relationship between unemployment and inflation. If the unemployment rate drops faster, officials likely will be more attuned to the potential for acceleration in inflation.

Some officials at the June meeting said they believe it is still possible the unemployment rate understates the level of slack in the labor market because of the potential for people who aren’t looking for jobs to return to employment, according to the minutes.

Fed officials first discussed in March the prospect of monetary policy moving from stimulating growth to possibly restricting growth, and the minutes released Thursday show that conversation has advanced.

Officials’ June projections show most expect the fed-funds rate would settle over the long run between 2.75% and 3%—an approximation of neutral.

Some officials have said they aren’t looking to increase rates to a level that would try to cool down the economy because they don’t want to push short-term rates higher than long-term rates, a so-called inversion of the yield curve that has typically preceded a recession by a year or so.

But officials reviewed staff research at the June meeting that offered reasons why the shape of the yield curve might be less meaningful now. For example, long-term yields could be depressed by recent bond-buying campaigns unleashed by the Fed and other major central banks.

“Some participants noted that such factors might temper the reliability of the slope of the yield curve as an indicator of future economic activity,” the minutes said.

Write to Nick Timiraos at nick.timiraos@wsj.com

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