Federal Reserve officials raised interest rates for the second time this year and upgraded their forecast to four total increases in 2018, as unemployment falls and inflation overshoots their target faster than previously projected.
The so-called “ dot plot” released Wednesday showed eight Fed policy makers expected four or more quarter-point rate increases for the full year, compared with seven officials during the previous forecast round in March. The number viewing three or fewer hikes as appropriate fell to seven from eight. The median estimate implied three increases in 2019 to put the rate above the level where officials see policy neither stimulating nor restraining the economy.
The Federal Open Market Committee indicated that even though it’s stepping up the pace of interest-rate hikes, economic growth should continue apace. “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,” according to its statement following a meeting in Washington.
The statement omitted previous language saying that the main rate would remain “for some time” below longer-run levels. Other changes included referring to “further gradual increases” instead of “adjustments.” Officials also said that “indicators of longer-term inflation expectations are little changed.” Previously, the statement made separate references to survey-based and market-based measures of such expectations.
While the course of interest-rate hikes remains gradual, the slightly more aggressive pace shows officials see more urgency to tighten policy, as unemployment already fell in May to the level they had forecast for year-end. U.S. growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion increase in federal spending, with inflation at the central bank’s 2 percent target for two months.
The statement retained language in place since late 2015 saying “policy remains accommodative.” Fed officials repeated their assessment that “risks to the economic outlook appear roughly balanced.”
‘Solid Rate’
“Economic activity has been rising at a solid rate,” the FOMC said in its statement. “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.”
Wednesday’s decision -- the sixth quarter-point increase in 18 months, raising the benchmark federal funds target rate to a range of 1.75 percent to 2 percent -- was a unanimous 8-0.
Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m., his second since taking the helm from Janet Yellen in February. Powell has repeatedly played down the dot plot as a guide to future interest rates, though investors continue to focus on it.
Updating their quarterly forecasts, officials projected the policy rate at 3.1 percent at the end of 2019, according to their median estimate -- compared with 2.9 percent seen in March -- and 3.4 percent in 2020, unchanged from the prior forecast.