"The economic outlook has strengthened in recent months", the Fed said in a statement at the end of a two-day meeting in which it lifted its benchmark overnight lending rate by a quarter of a percentage point to a range of 1.50 percent to 1.75 percent.
Whether they expect three or four rate hikes this year, investment strategists agree that the USA central bank is in the process of normalizing policy, raising rates as the economy strengthens, which, according to McMillan, "has been the goal for years". "The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong".
"Despite speculation that the Fed might signal a more aggressive approach to tightening monetary policy this year, the projection of three rate hikes in 2018 is in line with expectations", Bob Baur, chief global economist at Principal Global Investors, which manages $445 billion, said in an email.
Fed policymakers now project US economic growth of 2.7% in 2018, up from the 2.5% forecast in December, and have also marked up growth for next year.
The Fed's preferred measure of inflation was expected to end 2018 at 1.9 per cent, unchanged from the previous forecast, but it is seen rising a bit above the Fed's target next year. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.
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More so given recent reports that Trump would announce an increase in tariffs on Chinese imports this week and that China is already considering slapping higher tariffs on U.S. agricultural exports. The 2019 estimate rose to 2.4 percent from 2.1 percent in December. "Job gains have been strong in recent months, and the unemployment rate has stayed low", it said in a post-meeting statement.
The Fed's decision to raise the fed funds rate had an immediate impact on these rates Wednesday, sending them to 4.75% from 4.5%, mirroring the magnitude of the Fed's increase. This - plus the Fed's upwardly revised economic projections - raises the possibility of a fourth hike in 2018.
A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates. They now expect the unemployment rate to fall to 3.8 percent this year and 3.6 percent in 2019, a low level by historical standards. According to Freddie Mac, the average 30-year, fixed mortgage rate last week was 4.44 percent-a dip from the prior week, but nonetheless on a tear. The Fed asserted that part of the deviation from 2 percent reflects unusual price declines that occurred almost a year ago. Many Wall Street pros thought the Fed might pencil in four rate hikes this year because of higher inflation and an ultra-tight labor market. Markets have been rattled in recent weeks by Trump's tariff plans and embrace of a potential trade war.
"There is no sense in the data that we are on the cusp of an acceleration of inflation".