WASHINGTON, D.C. — The Federal Reserve raised interest rates by a quarter point on Wednesday, its first rate hike this year, in a decision that was widely anticipated by markets.
The recent rate hike was no surprise and a slightly more upbeat tone in the policy statement was consistent with Gov. Powell’s recent remarks. While acknowledging a somewhat softer start to the year for growth, the statement echoed Powell’s assertion that the economic outlook has improved since December.
That was reflected in the committee’s projections showing stronger growth over the next two years and a lower unemployment rate. There was also a slight nod to the inflationary impact of tight economic conditions with core inflation now projected at 2.1 percent in 2019 and 2020.
Alongside those changes there was only a slight shift in the much-anticipated ‘dot plot’—just one extra rate hike over the next two years compared with December’s projection. For 2018, the committee is now almost evenly split on whether two or three further rate hikes will be appropriate. “We think it will be the latter. As the Fed’s forecasts underline, fiscal stimulus is likely to keep the economy growing faster than its longer-run potential, lending some upside risk to the inflation outlook. Once-a-quarter rate hikes, still considered a ‘gradual’ pace, are appropriate,” stated Josh Nye, economist with RBC.
- The target range for the fed funds rate was raised to 1.50-1.75% in a unanimous decision.
- The statement noted the economic outlook has strengthened in recent months, though recent data point to a slightly softer start to the year for growth.
- The median GDP growth forecast was revised up by 1/2 percentage points over the next two years, likely reflecting fiscal stimulus. Unemployment was in turn revised lower.
- The median inflation projection now shows core prices rising slightly faster than the Fed’s 2% objective in 2019 and 2020.
- The ‘dot plot’ showed committee members are roughly split on whether two or three additional rate hikes will be appropriate this year. The median projection added one 25 basis point hike by the end of next year.
SOURCE: Economics Department of RBC Financial Group press release