Split FOMC continues to see three rate increases in 2018
Policy makers boost economic growth forecasts for 2018, 2019
Federal Reserve officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year.
“The economic outlook has strengthened in recent months,” the policy-setting Federal Open Market Committee said in a statement Wednesday in Washington. Officials repeated previous language that they anticipate “further gradual adjustments in the stance of monetary policy.”
The upward revision in their rate path suggests Fed officials are looking through soft first-quarter economic reports and expect a lift this year and next from tax cuts passed by Republicans in December. Financial conditions have tightened since late January as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger U.S. growth and tight labor markets.
“The job market remains strong, the economy continues to expand, and inflation appears to be moving toward the FOMC’s 2 percent longer running goal,” Powell said in a press conference that he kept somewhat shorter than those conducted by his predecessor, Janet Yellen. Powell said he’s “carefully considering” expanding the number of such briefings where he explains Fed decision, cautioning that he wanted to be sure that didn’t send any signals about the path of policy.
The vote to lift the federal funds rate target range to 1.5 percent to 1.75 percent was a unanimous 8-0.
The latest set of quarterly forecasts forecasts showed that policy makers were divided over the outlook for the benchmark interest rate in 2018. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.
In the briefing with reporters, Powell hued to the FOMC plan for gradual rate increases. While generally upbeat about the economy’s prospects, he also said the Trump administration’s trade policy has become a concern for businesses.
In the forecasts, U.S. central bankers projected a median federal funds rate of 2.9 percent by the end of 2019, implying three rate increases next year, compared with two 2019 moves seen in the last round of forecasts in December. They saw rates at 3.4 percent in 2020, up from 3.1 percent in December, according to the median estimate.
The S&P 500 Index of U.S. stocks were higher after Powell spoke, while the yield on 10-year U.S. Treasury notes were around 2.89 percent, little changed from Tuesday. The Bloomberg Dollar Spot Index was lower.
What Our Economists Say
“Powell showed important signals of continuity with the Yellen Fed. Language emphasizing ‘further gradual adjustments’ to interest rates was retained from Yellen’s final meeting, and the dot plot update remained centered on three hikes by year-end, although the distribution shows officials openly flirting with the possibility of a fourth hike. The Powell Fed is proceeding with a similar sense of gradual deliberation, at least for now.
— Carl Riccadonna and Yelena Shulyatyeva, Bloomberg Economics