Federal Reserve Officials Forecast Two Rate Hikes Next Year

The U.S. Federal Reserve on Wednesday raised its benchmark interest rate 25-basis points but reduced its projections for future rate increases. The decisions fueled a volatile response in the markets as expected with the Dow Jones Industrial Average falling as much as 400 points, wiping out an earlier 380 point gain.

Long-term U.S. government debt yields also fell sharply with the yield on the 30-year Treasury falling eight basis points to below 3 percent, while the yield on the 10-year Treasury dropped seven basis points to 2.7479 percent.

The drop in rates also drove the U.S. Dollar lower but the greenback has since come off its lows. The weaker U.S. Dollar triggered a spike to the upside in dollar-denominated gold.

The Fed raised interest rates, as expected, while acknowledging the impact of ongoing market volatility and potential weaker global economic growth. The central bank moved the target range for its benchmark funds rate to 2.25 percent to 2.5 percent.

Central bank officials now project two rate hikes next year, which is a reduction but still ahead of current market pricing of no additional moves next year.

In its monetary policy statement, the central bank said the U.S. economy has been growing at a strong rate and the job market has continued to improve. It also noted that “some” further gradual rate hikes would be needed, as subtle change that hinted it was preparing to stop raising borrowing costs.

The language in its monetary policy statement was not entirely dovish, or an actual easing of its outlook for rates. The Federal Open Market Committee continued to include a statement that more rate hikes would be appropriate, though it did soften the tone a bit.

“The Committee judges that some 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.

The FOMC also lowered its projections both for GDP and inflation. Additionally, it also lowered its outlook for the long-run funds rate, from 3 percent in the September forecast to 2.8 percent this month. The 2019 estimate declined to 2.9 percent from 3.1 percent and both 2020 and 2021 dropped to 3.1 percent from 3.4 percent.