Chances Rise for 4th Fed Rate Hike in 2018

Its median projection for GDP rose to 2.7% in 2018 and 2.4% in 2019, up from 2.5% and 2.1%, respectively from the Fed's December projections. The median projection for unemployment fell to 3.8% in 2018 and 3.6% in 2019, down from 3.9% and 4.1%, respectively, at the last meeting.

"This is fairly hawkish,"  says Jeff Klingelhofer, a portfolio manager for Thornburg Investment Management. It "signals that confidence is improving in [the Fed's] longer term outlook" for growth and "firming inflation."

Indeed, the Fed's policy statement noted that "the economic outlook has strengthened in recent months … labor market conditions will remain strong" and annual inflation "is expected to move up in coming months and to stabilize around the Committee's 2% objective over the medium term."

In an unanimous decision, the Federal Open Market Committee, in its first meeting under new Chairman Jerome Powell, raised the short-term fed funds rate 25 basis points to a range of 1.5% to 1.75%.

"The Fed is signaling its intention to move in the medium term, and this should pressure longer rates higher," said Klingelhofer.

Brad McMillan, chief investment officer at Commonwealth Financial Network, agreed that the Fed's statement was "relatively hawkish" and noted that latest dot plot has six Fed officials expecting four hikes this year, double the previous number. "At this point the case has to be for four rate hikes this year," says McMillan.

Mike Arone, chief investment strategist at State Street Global Advisors, disagrees.

He's still expecting just three rate hikes this year because Fed policymakers did not increase the median projection for core PCE (personal consumer expenditures minus food and energy) — the Fed's favorite inflation indicator — for 2018, only for 2019 and 2020; the Atlanta Fed Bank recently revised its outlook for first quarter GDP to 1.8% from more than 5% and recent measures of average hourly earnings and CPI have moderated.

"Without a big pickup in growth and still modest inflation, I still expect three hikes."

Whether they expect three or four rate hikes this year, investment strategists agree that the U.S. central bank is in the process of normalizing policy, raising rates as the economy strengthens, which, according to McMillan, "has been the goal for years."