Today, the Federal Reserve raised its benchmark interest rate for the third time this year—an increase in line with the series of gradual rate hikes the Fed has been making in an effort to normalize its balance sheet. The Fed increased short-term interest rates by a quarter percentage point to a range of 1.25 percent to 1.5 percent.
Fed presidents Charles Evans of Philadelphia and Neel Kashkari of Minneapolis voted against the interest rate hike.
The Federal Open Market Committee also raised its GDP estimate to 2.5 percent, up from 2.1 percent in September 2017. The inflation forecast for 2018 increased from 1.6 percent to 1.7 percent. The unemployment rate is projected to be 3.9 percent in 2018 and 2019, then tick upward to 4.0 percent in 2020. It is currently at 4.1 percent.
During a press conference that capped off the Fed's two-day policy meeting, Fed Chair Janet Yellen said that, if the Congressional tax plan is passed, the tax changes "will likely provide some lift to economic activity in coming years." However, she cautioned that "the magnitude and timing of the macroeconomic effects of any tax package remain uncertain."
On the subject of inflation, Yellen said, "For a number of years now, inflation has been running under 2 percent. I consider it a priority that inflation doesn't undershoot its objective."
The increase to the Fed's benchmark interest rate had been widely anticipated in the weeks leading up to the Fed's meeting, and further interest rate hikes are expected in 2018. However, today's increase is somewhat unusual given that inflation is currently low, remaining below the 2 percent rate goal set by the Federal Open Market Committee (FOMC).
Alan Levenson, Chief Economist at T. Rowe Price, told Business Insider, "This is the first tightening cycle where they've been concerned about inflation being too low.
Yellen previously addressed this concern during her Economic Outlook testimony before the Joint Economic Committee at the end of November 2017. “In my view, the recent lower readings on inflation likely reflect transitory factors," Yellen said. “As these transitory factors fade, I anticipate that inflation will stabilize around 2 percent over the medium term.”
The Fed's long-term plans for interest rates will also depend on the fate of the tax reform bill currently being hashed out in Congress. If the Fed anticipates that the $1.5 trillion in tax reductions over a decade will be good news for the economy, they will be more likely to plan further interest rate increases. If the Fed is less optimistic about the bill's impact on the economy, they may be more hesitant to implement further interest rate hikes as we move through 2018.
Powell stated during his confirmation hearings that he would likely follow Yellen's path of gradual interest rate increases.
Vassili Serebriakov, a foreign exchange strategist at Credit Agricole in New York, told Reuters, “It will probably reinforce the caution of the committee members that are concerned that the Fed is falling short of its inflation target. It also supports our view that the Fed will be fairly gradual next year.”