“The Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.” (The Federal Reserve’s FOMC Statement, March 21, 2018.)
The Federal Reserve’s first meeting under Chairman Jerome Powell hinted that the central bank might speed up the pace of interest rate hikes this year. The Fed also indicated that real GDP growth was stronger than it predicted in its previous December meeting.
At its recent meeting, the Fed raised the federal funds rate by 25 basis points up to a range of 1.5% to 1.75%.
This represented the sixth interest rate increase since December 2015, when the Fed started tightening monetary policy for the first time following the financial crisis. Nonetheless, it should be noted that the fed funds rate is still extremely low by historical standards.
While the Fed is still sticking to its December announcement that it would raise rates three times in 2018, officials did hint that they may be inclined to raise rates more frequently (i.e. four times this year) to keep the economy from overheating. Indeed, nearly one-half of the FOMC members now believe that four times will be necessary if the economy is to perform as well as they expect.
Officials also indicated that they expect to raise interest rates three times next year, an increase from the two increases in 2019 that they forecast in December.
This writer’s best guess is that the Fed will raise the funds rate four times this year, ending 2018 with a funds rate range of 2.25%-to-2.50%.
With respect to the economy, the Fed now expects faster economic growth this year — 2.7%, up from a forecast of 2.5% in December. (See the medium set of economic projections set out below.) Fed officials also raised their estimate for GDP growth in 2019 to 2.4%, up from 2.1%.
