The Federal Reserve raised short-term rates 0.25% in its last policymaking meeting for the year, as expected, and upgraded its economic outlook for this year and several following. The move pushed the short-term federal funds rate up to a range of 1.25% to 1.5%.
The Fed’s new dot plot, which reflects the median projections of Fed policymakers, lifted projections for GDP growth to 2.5% for this year and next, up from 2.4% and 2.1%, respectively, and lowered the expected unemployment rate to 4.1% from 4.3% this year and to 3.9% for 2018 and 2019, down from 4.1% previously. The upward revision in economic projections suggests three more rate hikes next year.
They also reflect expected tax cuts, which Fed Chair Janet Yellen, in her press conference today, said will likely increase economic activity though many effects of the cuts on the macro economy remain uncertain.
The median inflation projections remained below the Fed’s 2% target this year through 2019, reaching 2% in 2020.
“Our understanding of the forces driving inflation isn’t perfect,” said Yellen, noting that the Fed will carefully monitor inflation level and adjust policy as needed.
“With a 0.25% rate hike, despite continued low inflation, the Fed is focusing in on the strength of the labor market, signaling they are prepared to press on with rate increases and the path towards normalization in 2018,” said Joseph Davis, Ph.D., global chief economist and head of the Vanguard Investment Strategy Group, in a statement. “However, markets have not yet priced in the Fed’s expected path of three rate hikes next year, which could trigger short-term volatility.”
Brett Ewing, chief market strategist at First Franklin Financial Services, is also concerned about the Fed “moving too quickly” to raise rates “and getting ahead of itself” while inflation remains subdued. “The Fed has been so wrong on its inflation outlook.”
In her press conference, her last as chair, Yellen noted that the labor market is strong with sustained job creation, ample opportunities and rising wages and poised for further gains in the months ahead but that gains will moderate over time as monetary accommodation is reduced.
Former Fed Governor Ric Mishkin, on Bloomberg TV, said the Fed is confronting two opposing forces: an economy gathering strength with the potential for more gains from a stimulative tax bill and easy financial conditions and very low inflation.
“The Fed keeps on thinking this is temporary … but we just don’t see it happening. At some point it’s not so temporary … which could result in a change in policy.”
Two Fed policymakers dissented from the vote to hike interest rates Wednesday – Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari – presumably because inflation remains below the central bank’s target, a position they have indicated previously.