Fed hikes interest rates, raises its economic outlook and drops ‘accommodative’ language

The Federal Reserve hiked its benchmark interest rate a quarter point Wednesday, upped its anticipation for economic growth this year and next, and provided a road map of what lies ahead through 2021.

As widely anticipated, the policymaking Federal Open Market Committee increased the fed funds rate 25 basis points. That now takes the rate to a range of 2 percent to 2.25 percent, where it last was in April 2008. This is the eighth increase since the Fed began normalizing policy in December 2015.

The funds rate serves as the baseline for multiple forms of consumer debt as well as savings accounts and CD rates. The funds rate increase will be felt immediately in the prime rate and increase credit card charges, but its impact in other areas usually is more incremental.

Along with the rate increase, the FOMC continued to project one more hike before the end of the year and three in 2019.

The Fed had kept its target rate anchored near zero from December 2008 until this hiking cycle began as it sought to bring the economy out of the financial crisis slump. Since then, the central bank has sought to normalize policy through consistent but gradual increases.

The latest step in the normalization process, along with the rate move, came with Wednesday’s statement, in which the committee dropped language saying that “the stance of monetary policy remains accommodative.”

Markets had been watching to see whether that phrase would be excised after members had indicated at the August meeting that it would be time soon to make that move.

Committee members also indicated that it’s likely the funds rate would remain for two years above what they term the long-term “neutral” rate that is neither restrictive nor stimulative.

Outside of the rate hike and drop of the phrase, the statement was verbatim from the August meeting.

Along with the move, committee members showed a more optimistic view of the U.S. economy.

In the latest installment of their quarterly projections, FOMC officials collectively estimated gross domestic product to rise 3.1 percent in 2018, an upward revision from the 2.8 projection back in June.

The forecast for 2019 also moved higher by 0.1 percentage points to 2.5 percent. The estimate for 2020 remained at 2 percent.

Committee members for the first time released their 2021 projections, which see the economy growing at a 1.8 percent rate, aligning with the long-range forecast.

“The Fed is looking at an economy that in 2021 is slowing, and this is the first time they’ve said that,” said Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch. “I think the confidence about how long the economy is expected to stay strong is waning.”

The unemployment rate forecast ticked higher to 3.7 percent from June’s estimate of 3.6 percent.

Forecasts for interest rate moves ahead remain unchanged from June, though the expectations for individual members, expressed through the so-called dot plot, showed a greater range of estimates.

There was some upward drift in the grid. A dot widely believed to belong to St. Louis Fed President James Bullard, for instance, rose a quarter point for 2018. Two more hawkish dots for 2020 that saw the range between 4 percent and 4.25 percent drifted lower, though the dots overall for that year shifted higher.

The committee still indicated another rate hike before the end of 2018 and likely three more in 2019. There’s one more increase factored in for 2020, bringing the median range to 3.4 percent where it is expected to stay through 2021 before settling to 3 percent over the longer run, an increase from June’s projection of 2.9 percent.

That conflicts with current market expectations. Fed funds futures contracts currently are implying a rate of 2.825 percent by the end of 2019, which would put the market at least one rate hike behind the Fed’s intentions.

Wednesday’s decision was unanimous and the statement ran just 290 words.