Federal Reserve Hikes Interest Rates, Sees 2 More Hikes Coming In 2018

Federal Reserve officials met for the first time under new Fed Chairman Jerome Powell this week.

What Happened

The Fed raised the benchmark interest rate by one-quarter of a point to a range of 1.5 percent to 1.75 percent. The discount rate was raised from 2 percent to 2.25 percent.

The Fed sees a total of three rate increases this year, three next year and two in 2020. Fed officials project 2-percent GDP growth In 2020.

Why It's Important

"Based on the data inside the summary of economic projections and the dot plot forecast, investors and firm mangers should anticipate a fourth rate hike added to the scoreboard at the June 2018 FOMC meeting," said RMS Chief Economist Joe Brusuelas.

"The committee acknowledged the improvement in the outlook on growth by boosting its forecast to 2.7 percent for the year and bringing its forecast on the unemployment [rate] to 3.8 percent in the summary of economic projections, both of which imply upside risk linked to the impact of the Trump tax cuts and the roughly $320 billion in spending via the two-year budget agreement passed earlier in the year."

A 10-year rate at 2.91 percent is "seriously mispriced given the Fed’s dot plot forecast," Brusuelas said. 

"Either the market does not believe the Fed and will pay a price, or the Fed is seriously overestimating the underlying strength in the economy. Either way, the volatility in the fixed income market is about to get very interesting."

What's Next

S&P 500 futures ticked higher about 6 points heading into the Fed release and remained higher after it was released.

"The bottom line ... is that the economy is strong enough to absorb the rate hikes amidst a tight labor market and a modest acceleration in inflation," Brusuelas said. "The likelihood of strong wage growth and an increase in overall economic activity linked to a late-cycle fiscal boost from the federal government should broaden the distribution of economic benefits in a manner that was not apparent early in the business cycle."

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