As expected, the Federal Open Market Committee (FOMC) ended its June 12–13 meeting by hiking short-term rates by 25 basis points. This action—the second increase so far in 2018—was widely expected, with markets already pricing it in. More importantly, the Federal Reserve’s economic projections signal that there could be four hikes in the federal funds rate this year, up from a consensus estimate of around three. With the Federal Reserve’s action, the target range for the federal funds rate is now 1.75 to 2 percent. The projections show that range rising to 2.4 percent by the end of 2018 and 3.1 percent in 2019. The latter would indicate three hikes next year. With that said, the FOMC will hinge future interest rate increases on incoming data.
The acceleration of rate hikes likely stems from expectations of faster growth, especially in the labor market. The Federal Reserve sees the U.S. economy growing by 2.8 percent in 2018, up from an estimate of 2.7 percent in its March projections. On the jobs front, the Federal Reserve forecasts the unemployment rate falling to 3.6 percent in 2018 and 3.5 percent in 2019. That was lower than the 3.8 percent and 3.6 percent predictions this year and next year, respectively, in the Federal Reserve’s March analysis. The Federal Reserve wants to stay ahead of any overheating in economic growth, particularly as the job market falls further into “full employment” territory.
In its accompanying statement, the FOMC noted that “job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.” Growth in capital spending has been spurred both by improvements in the global economy and by passage of tax reform. In addition, while inflationary pressures have accelerated recently, they are not a concern at this time. The projections predict core PCE inflation of 2 percent in 2018, with 2.1 percent growth in both 2019 and 2020.
There were no dissentions on the FOMC on its decision to raise short-term rates, with all eight voting members affirming the action.