No Major Surprises from the Fed: Hikes Rates While Inflation Remains Below Target

The Fed raised its benchmark interest rate 25 basis points as widely expected on Wednesday. This led to a surprise rally in gold and an unexpected drop in U.S. Treasury yields. However, equity markets rallied on the news.

The U.S. Federal Reserve lifted its target range to 1.25 percent to 1.50 percent. The central bank also hiked its GDP estimate from 2.1 percent in September to 2.5 percent. The Federal Open Market Committee also adjusted its inflation forecast for 2018 to 1.7 percent from 1.6 percent.

There were no major surprises from the Fed. Inflation remains below the central bank’s target. However, the Fed remains poised to raise rate more aggressively if the economy starts to heat up.

In its decision, the FOMC mostly followed the script laid out earlier in the year, though it did indicate that one less hike is on the way for 2019. Two Fed presidents voted against the increase – Charles Evans of Chicago and Neel Kashkari of Minneapolis.

Although the FOMC raised its GDP estimate for 2018, it called for growth to come back down to 2.1 percent in 2019 and 2 percent in 2020. Both estimates, however, were above the respective 2 percent and 1.8 percent forecasts three months ago.

The FOMC made no mention of why it expected growth to accelerate, though many think this points towards optimism that more aggressive fiscal policy could be a help.

Fed officials also cut their estimates for the unemployment rate, to 3.9 percent in 2018 and 2019, two-tenths below the previous numbers. The 2020 rate is expected to be 4 percent, down from 4.2 percent, while the longer-run outlook remained at 4.6 percent.

In its monetary policy statement, the FOMC strengthened some of the wording regarding the economy in its postmeeting statement.

The statement highlighted that the jobs market “will remain strong,” an upgrade from the assessment at the October 31 to November 1 meeting that conditions “will strengthen somewhat further.” Later, the committee said the current stance of monetary policy is ‘supporting strong labor market conditions,” a contrast to the language from the previous meeting that indicated “some further strengthening.”