This afternoon, an increasingly transparent Federal Reserve Board raised its target on the federal funds rate by 25 basis points, or one-quarter of a percentage point. That move was widely expected and taken by itself should not have elicited much reaction by the markets. What Wall Street was not necessarily expecting was a suggestion that the lead bank was aiming for two additional rate hikes this year.
Our sense right along had been that the Fed would lift rates in today’s announcement, just as it had in March and likely would in September. What was somewhat more surprising, but not shocking, was that the central bank would likely vote for two more hikes in 2018--one in three months and another in six.
Meanwhile, in an unusually brief statement accompanying the move, the Federal Open Market Committee (FOMC) changed multiple phrases from its earlier announcements. On point, it is becoming more optimistic about economic growth and looking for somewhat higher inflation.
In its analysis, the Fed observed that economic growth had been rising at a solid rate; that the jobless rate has declined, rather than just stayed low; and that household spending has picked up. Thus, the Fed concluded that another rate hike at this time was most appropriate.
In additional statement adjustments, the Fed said that it expected GDP growth to be on the order of 2.8% for the full year, while it looked for core inflation to reach the Fed's 2% target by the end of the year. In the past, its inflation language had been more muted and vague. As before, we continue to look for three more rate hikes in 2019.
Meanwhile, stocks, off modestly before the rate announcement and accompanying statement, softened a bit further during the first minutes after its issuance, with the Dow Jones Industrial Average, in and out of the green earlier, falling back by some 50-60 points thereafter.
— Harvey S. Katz, CFA
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
