FOMC Boosts Funds Rate by an Expected Quarter Point

The Federal Reserve’s Open Market Committee (FOMC) decided Wednesday to raise the target range for the fed funds rate from a prior range of 1.50% to 1.75% to a new range of 1.75% to 2%. The vote was unanimous.

The committee also noted that overall inflation and core inflation (excluding food and energy) “have moved closer” to 2% and indicate that “longer-term inflation expectations are little changed, on balance.”

The rate hike was widely expected and markets had been reasonably calm with the blue-chip Dow and the S&P 500 trading flat and the Nasdaq composite up about 0.3%. The higher lending rate sent all three indexes down.

The next data point traders and investors get will come tomorrow morning when the European Central Bank is expected to announce that it will maintain its acccomodative policy with no change.

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The FOMC also released its economic projections for the three-year period through 2020. Median GDP growth in 2018 is seen rising by 2.8%, up from the March projection of 2.7%. Projections of GDP growth of 2.4% next year and 2% in 2020 were unchanged.

The forecast for median personal consumption expenditures (PCE) inflation rose from 1.9% in the March projection to 2.1%. The FOMC now projects the same level for both 2019 and 2020. Median core PCE inflation is forecast at 2% for this year, up from the March projection of 1.9%. The core inflation projection for the next two years is unchanged from March at 2.1%.

The projected unemployment rate for this year has been dropped from a March level of 3.8% to a new estimate of 3.6%. Projections for 2019 and 2010 were also lowered from 3.6% in both years to 3.5% in both years.

The median FOMC forecast for the Fed funds rate rose to 2.4% for this year and rose to 3.1% next year and 3.4% in 2020. The new forecast replaces the March projections for a Fed funds rate of 2.1% at the end of this year, 2.9% at the end of 2019, and 3.4% in 2020.

In a terse wrap-up statement the FOMC said: “Risks to the economic outlook appear roughly balanced.”

The expert Fed tea-leaves readers may see at least two more rate hikes this year to reach the new forecast level of 2.4% and that could be weighing on equity markets now.

Shortly after the statement was published equity markets moved slightly lower with real-estate and basic materials sectors taking the heaviest blows. The yield on 10-year Treasuries rose by nearly 3 basis points to 2.976% and the dollar remained basically flat.

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