The Federal Reserve raised its short-term federal funds rate 0.25% to a range of 1.75% to 2%, as expected, but also indicated two more rate hikes this year for a total of four, followed by three in 2019. As recently as March, the Fed was indicating just three hikes this year.
The more aggressive projection reflects a more bullish economic outlook from the Fed.
Fed policymakers lowered their median forecast for unemployment to 3.6% this year, down from 3.8% previously, and to 3.5% for the following two years.
At the same time they raised their median projections for headline Personal Consumption Expenditures, the Fed’s favored gauge of inflation, to 2.1% this year and the next two, up from 1.9% for 2018 and 2% for 2019 (its 2020 projection was unchanged). Core PCE inflation, which exempts food and energy, is projected to increase to 2% this year, up from 1.9% previously, and 2.1% for the each of the next two years.
Inflation is “just about at our 2% goal,” said Fed Chairman Jerome Powell in his press conference following the policy announcement from the Federal Open Market Committee. But he added that the central bank was “not ready to declare victory until we sustain that over time, which we haven’t done yet.”
The Fed also raised its median forecast for GDP growth in 2018 to 2.8%, up from 2.7%, but made no changes for projections of 2.4% and 2% for 2019 and 2020.
In its statement, the Fed noted that “economic activity as been rising at a solid rate, job gains have been strong … [and] business fixed investment has continued to grow strongly.”