The Fed: Fed hikes interest rates and increases expectations of 2018 increases

By

Senior economics reporter

Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 p.m.

The Federal Reserve on Wednesday voted to raise its benchmark federal-funds rate by a quarter-percentage point and became slightly more hawkish on its expectations for what it will have to do this year.

The Fed increased the federal funds rate target to a range of 1.75% and 2% and forecasted it expected to raise rates four times this year, up from a forecast of three in March.

Stocks DJIA, -0.12%  turned lower and the yield on the 10-year Treasury note TMUBMUSD10Y, +0.72%   moved higher after the decision.

See: Live blog and video of Jay Powell press conference and Fed decision

The move did not reflect a major shift in the Fed’s thinking. The “dot plot” shows only one official switched to a slightly higher interest-rate path.

And the difference between three and four moves this year remains extremely narrow. Eight Fed officials said they expected interest rates to rise at least four times while seven forecast three rate hikes.

Ahead of the decision, analysts said a signal of four rate hikes would indicate the Fed is focusing more on the low U.S. unemployment rate and not worried about weakness overseas or recent market turmoil sparked by Italian politics.

The central bank made several changes to the statement to reflect the economy is much firmer ground.

See the June FOMC statement

Gone is language that said the Fed expected the federal funds rate was “likely to remain, for some time, below levels that are expected to prevail in the longer run.”

This is a signal the Fed no longer thinks money is cheap, although it is not sure how high they will increase its benchmark rate.

The Fed’s dot plot now shows it raising rates three times in 2019 and one time in 2020. The terminal rate remains at 3.4%.

The Fed also removed language that it would “carefully monitor” inflation. The central bankers also noted that the economy was growing at a “solid” rate.

In a tweak, the Fed raised the interest rate on excess reserves, which sets the upper band of the federal funds range, by only 20 basis points to 1.95%. The central bank first signaled the possible tweak in the minutes of its most recent policy meeting released last month.

The move gives the Fed some cushion because the effective fed funds rate has been regularly trading at the upper end of the band. Analysts said they will watching where the fed funds rate trades because it could be a signal there is less liquidity in the reserve market, which might cause the Fed to stop shrinking the assets on its balance sheet sooner than expected.

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