Fed Strongly Suggests Two More Rate Hikes by Year’s End

Gold rallied, stocks weakened and U.S. Treasury instruments were mixed after the U.S. Federal Reserve hiked its benchmark short-term interest rate 25 basis points on Wednesday and indicated that two more increases are likely this year.

The rate hiked pushes the Federal Funds rate target to 1.75 percent to 2.00 percent. In what analysts described as “an unusually terse statement” that ran just 320 words, the Federal Open Market Committee changed multiple phrases from its previous statements, pointing to a more optimistic view on economic growth and higher inflation expectations.

Key Changes to Policy Statement

• The FOMC said economic growth has been “rising at a solid rate,” and upgrade from “moderate” in May.
• The unemployment rate has “declined,” as opposed to “stayed low.”
• Household spending “has picked up,” an upgrade from “moderated.”

In calling for two more rate hikes this hear, the FOMC said, “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,” the statement said.

That statement was generally perceived by analysts as extremely hawkish. In its previous statement, the committee had characterized rate hikes as “gradual adjustments” rather than “increases,” and the “sustained expansion” portion was completely new.

The Fed also continued to suggest it would allow inflation to run a little hot, above its 2 percent inflation target before putting on the brakes with additional rate hikes.

Economic Forecast

The FOMC indicated in the update to their quarterly economic forecast that they expected core inflation to reach the Fed’s 2 percent target by the end of the year, and now see economic growth hitting 2.8 percent for the full year.

Members also raised expectations for GDP and personal consumption by 0.1 percentage points. The committee also cut their forecast for unemployment. They are now predicting a 3.6 percent rate by year’s end, compared with the current 3.8 percent.

Members are also calling for three more rate hikes in 2019. Headline inflation projections stayed at 2.1 percent for 2019 and 2020.