Fed Chairman Jerome Powell. (Photo: AP) Fed Chairman Jerome Powell. (Photo: AP)

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.”

This is a pretty upbeat statement,” said Brad McMillan, chief investment officer of the Commonwealth Financial Network.  With ‘strong’ job gains and ‘solid’ economic growth, and ‘strongly’ growing business investment, the Fed is clearly sold on continued growth. … Two more increases seem most likely, with a real possibility of more.”

“The Fed is optimistic, confident, direct and hawkish,” said Ward McCarthy, chief financial economist at Jefferies.

Jeff Klingelhofer, a fixed income portfolio manager at Thornburg Investment Management, said the Fed’s stronger economic projections indicate that the “incoming data suggest the economy is strengthening MORE than the committee expected, and thus they are perhaps playing a game of catch-up. … I don’t believe the Fed is good at this, and instead to me it signals they will continue to tighten, generally until something breaks.”

The Fed’s statement noticeably omitted forward guidance that had been included in its statements for several years, which says that the fed funds rate is likely to remain below an expected long-run level.

“Now is an appropriate time to remove this forward guidance in policy statement,” said Powell in his press conference, adding that the Fed continues “to believe a gradual approach is best.” Powell explained that if the Fed is too slow to tighten it would need to do so “abruptly down the road,” but if it tightened too rapidly the economy could “weaken” and inflation could remain “persistently below” the Fed’s 2% objective.

The Fed also made no mention of geopolitical tensions or trade disputes in its statement. When asked about that in his press conference, Powell said the Fed was “ beginning to hear reports of companies holding off on making investments and hiring [but] right now, we don’t see that in the numbers at all. The economy is very strong.”  He added that these he would put it “down as more of a risk.”

There was little reaction in financial markets initially to today’s Fed announcement, but by the time the market closed the Dow Jones Industrial Average was down almost 120 points, or 0.5%. Bond yields were little changed.