Key Points

  • The Fed raised rates by 25 basis points this week, for the third time this year, which was widely expected.

  • There were only minor changes to the Fed’s projections; however the long-run neutral estimate of the fed funds rate did inch up; while the “accommodative” language was eliminated from the Fed’s statement.

  • Updated expectations are now that the Fed will hike once more this year, and three times next year, in keeping with an upgraded economic outlook.

The Federal Open Market Committee (FOMC) surprised no one today and raised rates for the third time this year in a unanimous decision. The Fed reaffirmed the expectation that another hike is on the table this year, and three more hikes are likely in 2019, based on the so-called “dots plot.” There were some defections among FOMC members from three to four hikes expected this year, which cemented the likelihood of another rate hike in December. The move brought the federal funds rate to a target range of 2-2.25%. The FOMC’s statement contained a reiteration of its upbeat assessment of the U.S. economy, and did not mention concerns about trade potentially halting rates’ upward trajectory. Stocks rallied and longer-term bond yields retreated in the immediate aftermath of the announcement.

The statement did have a change, which was somewhat expected: dropped was the long-standing description of monetary policy as “accommodative” in reflection of rates having moved closer to the so-called “neutral” level which neither constrains nor boosts the economy. Fed officials repeated their assessment that “risks to the economic outlook appear roughly balanced.” However, during the post-FOMC meeting press conference, Fed Chair Jerome Powell did use the word “accommodative” to describe “overall financial conditions.”

The Fed also released new forward-looking projections for the economy. The median forecast continues to show that short-term rates will reach 3.4% in 2020 (no change from June’s projections). But the new projections now include a look into 2021, when the Fed expects the fed funds rate to remain at 3.4%. The median long-run neutral estimate did move up slightly, from 2.9% to 3.0%. The Fed also updated its projections for the economy, unemployment and inflation; all seen below. It was the eighth consecutive time the Fed has had to upgrade its projections.