The Federal Reserve hiked its benchmark short-term interest rate a quarter percentage point Wednesday and indicated that two more increases are likely this year.
The move pushes the funds rate target to 1.75 percent to 2 percent. The rate is closely tied to consumer debt, particularly credit cards, home equity lines of credit and other adjustable-rate instruments.
In an unusually terse statement that ran just 320 words, the Federal Open Market Committee changed multiple phrases from its previous missives, pointing to a more optimistic view on economic growth and higher inflation expectations.
Though the statement contained less than half the words of some of the committee’s typical communiques, there was a lot to unpack in the language.
The committee said economic growth has been “rising at a solid rate,” an upgrade from “moderate” in May. The unemployment rate has “declined,” as opposed to “stayed low,” and household spending “has picked up,” an upgrade from “moderated.”
With that in mind, the committee said two more rate hikes were appropriate, bringing the 2018 total to four increases. Its first hike this year was in March.
“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term,” the statement said.
That sentence itself featured multiple instances of more hawkish language.
The committee previously had characterized rate hikes as “gradual adjustments” rather than “increases,” and the “sustained expansion” portion was completely new.
However, the statement twice retained language that the Fed had a “symmetric” 2 percent inflation target, indicating a tendency to let price pressures run a little hot before putting the clamps on growth.
With the 0.25 percentage point increase already priced in, financial markets were looking for how aggressive the FOMC would be in setting monetary policy for the rest of the year.
Markets had been waffling over expectations for a fourth rate hike this year — the FOMC also increased the funds rate target in March — and prior to the meeting were pricing in a 46.5 percent chance. The latest projections from committee members indicate the funds rate to rise to 2.4 percent by the end of the year, a 0.3 percentage point increase from the March forecast.
Stocks edged lower after the FOMC release while government bond yields nudged higher.
“They telegraphed it. The only incremental surprise is just that the now expect four rate hikes, and I suppose that’s why the market is a little weaker on that news,” said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management. That accelerates the move from the Fed’s being neutral to more restrictive.”
Committee members indicated in the update to their quarterly economic forecast that they expected core inflation to reach the Fed’s 2 percent target by the end of the year, and now see economic growth hitting 2.8 percent for the full year.
Both the expectations for gross domestic product and personal consumption reflected a 0.1 percentage point increase from the last estimates in March and were enough to push the so-called dot plot of individual committee member rate expectations to a more aggressive position. Three committee members moved their expectations higher for rates.
In addition to the upward projections for GDP and inflation, committee members also cut their forecast for unemployment. They now see a 3.6 percent rate by year’s end, compared with the current 3.8 percent, which was the full-year projection in March.
The committee also indicated it continues to expect three more rate hikes in 2019, even with the fourth one this year.
Despite the added hike, officials still see the long-run funds rate at 2.9 percent after peaking at 3.4 percent in 2020. The extra hike, though, pushes the rate past “neutral” in 2019, a little sooner than anticipated. They still see GDP rising 2.4 percent in 2019 and 2 percent the year after, and longer-range growth at 1.8 percent.
The headline inflation forecast, which includes food and energy, rose one-tenth of a point to 2.1 percent in 2019 and stayed at that level for the following year. Headline inflation projections also stayed at 2.1 percent for 2019 and 2020.