The Federal Open Market Committee raised the federal funds rate target to a 1.50% to 1.75% range, as expected, while the Summary of Economic Projections still calls for three hikes this year.
The meeting was the first led by Jerome Powell, and with a more hawkish voting slate, the attention was more on the SEP than the expected rate hike. There was a divide as to whether the SEP would signal four hikes this year or three.
The vote to raise rates was unanimous, 8-0.
“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1.1/2 to 1-3/4 percent,” the statement said. “The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.”
Policymakers remain divided about rate hikes, with seven officials expecting at least four 25 basis point increases in 2018, and eight seeing three or fewer as appropriate.
The SEP sees rates at 2.9% at the end of 2019, which would mean three hikes next year too. The prior SEP saw two hikes as appropriate in 2019. The 2020 forecast sees rates at 3.4%, up from 3.1% in the previous SEP.
BNP Paribas Asset Management senior economist Steven Friedman said before the announcement that while he expects four rate hikes this year, he doesn’t expect the SEP to reflect that until the next release, in June, “when there should be additional evidence of firming inflation as well as additional downward pressure on the unemployment rate.” While some FOMC members “have generally expressed greater optimism about the outlook,” they “appear to be taking a wait and see approach for now.”
The hike was “well anticipated by markets, and we still believe rates are likely to have a slow upward trend for the remainder of the year,” according to Ruben Gonzalez, chief economist, Keller Williams.
“Futures markets are now pricing in a 35% chance of four hikes in 2018,” said Payden & Rygel Chief Economist Jeffrey Cleveland before the announcement. “It’s possible we see that probability figure climb on Wednesday and in the coming weeks.”