A divided Federal Open Market Committee voted Wednesday to raise the federal funds rate by 25 basis points to a target range of 1.25% to 1.5%. Two of nine members voted against the interest rate hike.
Committee members said in a statement that the labor market has continued to strengthen since their November meeting, and economic activity "has been rising at a solid rate." That left most members expecting the economy to continue to expand at a moderate pace, "with gradual adjustments in the stance of monetary policy," the statement said.
Members also presented their summary of economic projections, which indicates their expectations for future rate hikes in 2018 and beyond. FOMC participants indicated that they see three more rate hikes in 2018 and two in 2019.
"There's not a lot of change in the near-term dots in the next couple years, and I think the markets liked that," said Robert Tipp, managing director and chief investment strategist at PGIM Fixed Income. "The Fed is staying very even-handed. Inflation and wage numbers are very tame, and as a result, there's no real acceleration in pace of hikes," said Mr. Tipp. He agreed that the two dissenting votes against the rate hike had a good case for holding back, but noted that there will be "a different cast of characters next year," when several more dovish members leave the board.
Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said, "It's clear that the Fed thinks it can hike three more times next year. But that's a forecast that markets don't yet buy, and it's data more than rhetoric that will ultimately convince investors,"
"What markets want to know is two things: how much of a boost does the Fed think tax cuts will have, and the million-dollar question of whether their faith in the Phillips curve has shaken," said Mr. Batholomew. The Phillips curve is a model used to describe a historical inverse relationship between rates of unemployment and corresponding rates of inflation.
At a press conference following the meeting, Chairwoman Janet Yellen said the lower corporate tax rates expected to be enacted by Congress shortly will lower the cost of capital, but will be one of many factors in future FOMC rate hike decisions.