The Federal Reserve on Wednesday raised short-term interest rates for the second time this year and signaled a faster pace of rate hikes through the end of the year.
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As expected, policymakers at the central bank said they voted to hike the benchmark federal funds rate by a quarter percentage point, setting a range of 1.75% to 2%. The Fed expects to raise rates twice more in 2018, bringing the yearly total to four and confirming investor speculation that rate hikes would accelerate. Officials previously indicated that three rate hikes would come this year.
Economists and Wall Street strategists are closely following the Fed’s policy moves. The Fed has signaled that it will continue to gradually increase rates in response to higher inflation and strength in the U.S. labor market. Officials have also set in motion a plan to reduce the Fed’s bond holdings, as the central bank moves away from accommodative policies employed during and after the 2008 financial crisis.
The Fed’s updated expectation of four rate hikes this year “is consistent with the idea that inflation and economic growth are proceeding at a faster pace than was expected last year,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
In its statement, the Federal Open Market Committee continued to brighten their view of the U.S. economy. It now expects gross domestic product (GDP), or economic growth, to jump 2.8% this year, higher than its previous forecast of 2.7%. The Fed also projected that the unemployment rate will fall to 3.6% this year and 3.5% in 2019, better than prior estimates of 3.8% and 3.6%, respectively.
Prices are also picking up, as the Fed sees inflation reaching 2.1% this year. The Fed previously provided a forecast of 2%, matching its internal inflation target.
“With ‘strong’ job gains and ‘solid’ economic growth, and ‘strongly’ growing business investment, the Fed is clearly sold on continued growth. Inflation has moved ‘close to 2 percent,’ the target range, while longer-term inflation expectations are still in line,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “This statement is as close to a declaration of victory as we will ever see.”
A faster pace of U.S. economic growth will force the Fed to wrestle with how quickly it should raise interest rates beyond 2018. The Fed’s statement removed language indicating that rates would be held below a neutral level “for some time.” During a press conference following the two-day meeting, Fed Chairman Jerome Powell said if inflation rises above the 2% target, the central bank can adjust its policies to bring inflation back down.
Powell also announced that he will answer questions from reporters after every Fed meeting, starting in January.
The yield on the benchmark 10-year Treasury note briefly climbed above 3% for the first time since May 24.