The Federal Reserve did what just about everyone expected earlier today and raised short-term interest rates by 0.25 percentage points. The federal funds rate is now in a range from 1.25 - 1.50% and the Fed is now paying banks 1.50% on their reserve balances.

Today's move was the third 25 basis point rate hike in 2017, matching the Fed's median projection for rate hikes that it made a year ago. At present, the Fed's "dot plot," which it releases at the last meeting of every calendar quarter, projects another three rate hikes in 2018. That would bring the funds rate to a range of 2.00% to 2.25% and the rate on reserves to 2.25%. The Fed did not change its forecast for another two or three rate hikes in 2019, but suggested a chance of a slightly higher peak for the funds rate in 2020. Regardless, the median Fed policymaker has the long-run funds rate at 2.75%.

Despite the lack of change in the projected path of interest rates, there were some noticeable changes to the outlook for the economy in the near term. In particular, the Fed now expects 2.5% economic growth in 2018 (Q4/Q4) versus a prior estimate of 2.1% and expects growth to be slightly stronger than previously estimated in 2019-20 as well.

Meanwhile, the Fed projects a lower bottom for the unemployment rate in 2018-19: 3.9% versus 4.1%. Oddly, the reason for the lower bottom is not the faster economic growth over the next few years but simply because, at 4.1%, the jobless rate is already lower than the 4.3% the Fed thought it would get to this year. Another way to think about it is that the Fed is still forecasting a 0.2 percentage point drop in the jobless rate in 2018 and no change in 2019, the same as it was forecasting back in September.

The only way we can square faster growth with no change in the drop in unemployment is that the Fed anticipates faster productivity growth in the next few years. We think that makes sense given that the tax cut now winding its way through Congress should enhance supply incentives and boost capital investment.