The Federal Open Market Committee on Wednesday raised the federal funds rate 25 basis points to a range of 1.75% to 2% as expected, but increased the projected number of rate hikes this year.
In a unanimous vote, the eight committee members who attended the two-day meeting approved the increase, citing a strong labor market and a sustained return to the Fed's 2% inflation target.
FOMC member projections shifted to four rates hikes in 2018 from three. Chairman Jerome Powell said that was due to solid economic indicators. "Growth is strong, labor is strong and inflation is close to target," Mr. Powell said at a post-meeting news conference.
The Fed also removed a line from its forward guidance that had said, "the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." Mr. Powell noted that he and his fellow FOMC members project , on average, the federal funds rate to rise to 2.4% by the end of 2018, 3.1% by the end of 2019 and to 3.4% by the end of 2020.
"This is the biggest change in Fed messaging for quite a long time," said Brian Coulton, chief economist at Fitch, in a statement. "The Fed sounds more bullish on the economy and has noted the decline in the unemployment rate."
Mr. Powell highlighted that the unemployment rate reached 3.8% in May, down from 10% during the height of the financial crisis.
Ed Keon, chief investment strategist and senior portfolio manager at Quantitative Management Associates, said in an interview that Wednesday's announcement will not change his company's portfolio allocation. "We have been overweight in stocks all year, and we are not going to change anything," Mr. Keon said.
John Hollyer, global head of Vanguard Group's fixed-income group, said in a statement that concerns about the Fed "being behind the curve and allowing the economy to overheat may be replaced with concerns around the faster pace of tightening in the coming quarters."
Mr. Powell defended the Fed's gradual rate increase strategy by saying the central bank has been careful not to tighten too quickly. A move that has "borne fruit," he said at the news conference.
"The Fed's path of gradual rate hikes and slow sheet reduction seems well-established at this point," said Aaron Anderson, senior vice president of research at Fisher Investments, in an email. "The trajectory of U.S. inflation or the broader U.S. economy would likely need to change materially for the FOMC to deviate from that path. But U.S. economic data has been remarkably steady."
