Federal Reserve officials last month said they expect to keep raising interest rates and suggested that next year, the rates could be high enough to potentially start slowing growth, according to minutes of their discussion released Thursday.
While noting a strong economy, Fed officials appeared vigilant about emerging risks, especially trade tensions, and the dangers of an economy that might overheat. The officials noted heightened concerns from businesses about President Trump's trade policies and noted that some executives had already scaled back future spending plans because of the uncertainty.
They also said they were monitoring changes in interest rates that are set by the market. A narrowing in the gap between short-term and long-term rates has been an accurate predictor of downturns in the past.
The minutes covered the discussions at the Fed's June 12-13 meeting in which the central bank boosted its key rate for a second time this year to a new range of 1.75% to 2%. Fed officials also upped their projection for the number of rate hikes they plan to make this year, to four from three. The Fed dropped language it had been using for years promising to keep rates at levels that would boost economic growth “for some time.”
The minutes said this change was made because officials believed it “was no longer appropriate in light of the strong state of the economy and the current expected path for policy.”
The minutes said that officials discussed how under their expected path for future rate hikes, the Fed's key policy rate — known as the federal funds rate — could be at or even above the neutral level, the point where the rate is neither stimulating economic growth nor holding it back.
In the Fed's latest projection, it put this neutral rate at 2.9%. But its new projections put the benchmark rate at 3.1% by the end of next year, which would be above the 2.9% neutral level. The projections have the funds rate rising to 3.4% by the end of 2020.
Because of this expected path, the minutes said that a number of officials said it might soon be appropriate to drop the language in the policy statement indicating that the stance of monetary policy “remains accommodative.” That is the phrase the Fed uses to say that rates are still low enough to stimulate growth.
Despite the current growth prospects and inflation finally reaching the Fed's goal of 2% annual gains in prices, the minutes noted a number of “risks and uncertainties” facing the economy. Officials said that the risks associated with trade policy had “intensified,” with the uncertainty potentially hurting business sentiment and investment spending.”
The Trump administration has imposed tariffs on steel and aluminum imports and has also threatened to impose tariffs on billions of dollars in other Chinese products, including tariffs on $34 billion in Chinese goods that were scheduled to take effect Friday. Beijing has promised to retaliate with tariffs on U.S. goods.