The Federal Reserve today did just what the financial markets were expecting: It raised the key short-term federal funds rate by 0.25% to a range between 0.75% and 1%.
"The Fed told us what they were going to do and just did it and did it without changing their economic forecast," said Vince Reinhart, chief economist for Standish Mellon Asset Management who spent 24 years working at the Fed. "It plans to tighten three times this year. The Fed is executing a plan."
In other words, the Fed will hike rates two more time in 2017, most likely in September and December, said Reinhart. Vanguard's chief economist, Roger Aliaga-Diaz, expects the next rate hike could come as early as June, as do IHS Markit economists Nariman Behravesh, Sara Johnson and Ozlem Yaylaci, "if job growth continues at the pace of January and February."
In addition to hiking rates, the Fed today also released its latest projections for the U.S. economy and fed funds rates through 2019, showing little or no change from projections made at its last meeting in December.
GDP forecasts were unchanged with median forecasts at 2.1% for 2017 and 018 and 1.9% in 2019. The median unemployment rate projection remained at 4.5% for all three years and the project for core PCE inflation, its favoriate inflation indicator, rose slightly to 1.9% from 1.8% for 2017 and remained unchanged at 2% for the remaining years.
Its fed funds forecast was unchanged at 1.4% for 2017, 2.1% for 2018 but rose slightly to 3% from 2.9% for 2019.
Fed chair Janet Yellen, in a press conference following today's policy move, said the central bank's projections are "essentially unchanged" since December and iterated that Fed "policy is not on a preset course" and will depend on changes in the economy as well as changes in fiscal policy which "can influence" its outlook. "We will continue as always to assess economic conditions," said Yellen.
Financial markets seem pleased with the Fed's move today.
The Dow shot up more than 60 points on the move, for a gain of more than 100 points by midafternoon, while Treasury yields retreated slightly with the 10-year note, falling to 2.5% from 2.57% earlier in the day, and the dollar fell against major currencies.
