Fed raises interest rates, but it’s sticking to cautious strategy for 2018

The Federal Reserve on Wednesday lifted a key U.S. interest rate, but it stuck to a script for three rate hikes in 2018 even as it gave a more upbeat forecast for the economy. In the first meeting of Fed Chairman Jerome Powell, the central bank avoided sending any overtly hawkish signal about its interest-rate policy.

The Fed stuck to its December forecast of three interest-rate hikes this year, but central bankers did push up their expected rate path in 2019 and 2020, however. “This confirms our core view on Fed policy: rate hikes will remain gradual in 2018, but significant fiscal stimulus implies a hike cycle that is more likely to continue through 2019,” said Andrew Hollenhorst of Citi in a note to clients. As widely expected, the Fed raised its benchmark federal-funds rate by a quarter percentage point to between 1.5% and 1.75%. That is the sixth quarter-point move since December 2015.

In its statement, the Fed said “the economic outlook has strengthened in recent months,” while noting that household and business fixed investment “have moderated from their strong fourth-quarter readings.” The Fed now sees a total of eight quarter-point hikes in the fed-funds rate through the end of 2020. That includes three increases this year, including Wednesday’s move, three in 2019 and two in 2020, By the end of 2020 rates would end up near 3.4%. That’s above the Fed’s revised estimate of longer-run neutral federal-funds rates. The Fed ticked up its estimate of the long-run neutral interest rates to 2.9% from 2.8% in December. That is the rate that is neither boosting nor tightening economic conditions.

But other economists said the slowdown in growth in the first quarter gave the Fed room to wait. They argued the Fed could easily signal it intends to boost interest rates four times at its June meeting if economic conditions warrant. Stocks  finished with slight losses, and bond yields  edged lower. There were no dissents from the Fed policy statement.