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Fed raises rates, predicts steeper path for future hikes

Fed officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year.

“The economic outlook has strengthened in recent months,” the policy-setting Federal Open Market Committee said in a statement. Officials repeated previous language that they anticipate “further gradual adjustments in the stance of monetary policy.”

The vote to lift the federal funds rate target range to 1.5% to 1.75% was a unanimous 8-0.

The upward revision in their rate path suggests Fed officials are looking through soft first-quarter economic reports and expect a lift this year and next from a tax overhaul passed by Republicans in December. Financial conditions have tightened since late January as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger U.S. growth and tight labor markets.

federal-reserve-building-bloomberg-iag-2016
A pedestrian walks past the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S., on Tuesday, Dec. 15, 2015. Economists and traders expect the policy-setting Federal Open Market Committee to raise interest rates tomorrow for the first time since 2006, marking the beginning of the end for the unprecedented era of easy monetary policy. Photographer: Andrew Harrer/Bloomberg

The latest set of quarterly forecasts showed that policy makers were divided over the outlook for the benchmark interest rate in 2018. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted.

In the forecasts, U.S. central bankers projected a median federal funds rate of 2.9% by the end of 2019, implying three rate increases next year, compared with two 2019 moves seen in the last round of forecasts in December. They saw rates at 3.4% in 2020, up from 3.1% in December, according to the median estimate.

INFLATION PICKUP
The Fed said inflation on an annual basis is “expected to move up in coming months,” after saying “move up this year” in the January statement. Price gains are still expected to stabilize around the Fed’s 2% target over the medium term, the FOMC said.

The central bank’s preferred price gauge rose 1.7% in the 12 months through January and officials projected it to rise to 2% in 2019 and hit 2.1% the following year, the latest estimates showed. The estimates for inflation excluding food and energy, which officials see as a better way to gauge underlying price trends, rose to 2.1% in 2019 and 2020 from 2% seen in December.

The median estimate for economic growth this year rose to 2.7% from 2.5% in December, signaling confidence in U.S. consumers despite recent weak readings on retail sales that have pushed down tracking estimates of first-quarter activity. The 2019 estimate rose to 2.4% from 2.1%.

The committee’s forecast for the long-run sustainable growth rate of the economy was unchanged at 1.8%, suggesting policy makers are still skeptical of the effect of tax cuts in the economy’s capacity for growth. The 2020 gross domestic product growth median projection was also unchanged at 2%.

Bloomberg News