Fed Raises Interest Rates as Focus Turns to 2018

WASHINGTON — • The Federal Reserve, in a widely expected decision, raised its benchmark rate by a quarter of a percentage point, to a range of 1.25 percent to 1.5 percent.

• The Fed also predicted stronger economic growth over the next three years. It forecast 2.5 percent growth in 2018, well above its previous forecast of 2.1 percent growth in 2018, published in September. Janet L. Yellen, the Fed chairwoman, said the faster growth forecasts reflected an assessment of the $1.5 trillion tax cut moving through Congress.

Officials did not deviate from their 2018 outlook for interest rates or inflation and continued to signal three interest rate increases next year.

Things are looking up.

The Fed continues to raise interest rates because officials are confident that the economy is in good health. This is the third time the Fed has raised its benchmark rate this year.

In a statement published after a two-day meeting of its Federal Open Market Committee, the Fed said recent economic data showed that “the labor market has continued to gain strength and that economic activity has been rising at a solid rate.”

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But the Fed remains cautious about the pace of rate increases. In an updated economic forecast, Fed officials predicted that inflation would stay below the Fed’s 2 percent target next year, and then stay at 2 percent in 2019 and 2020. With inflation expected to remain under control, Fed officials continued to predict a measured march toward higher rates. They forecast the Fed’s benchmark rate would rise to 3.1 percent by the end of 2020, up slightly from the last forecast of 2.9 percent.

Concern about the low level of inflation led two officials to vote against the rate increase: Charles L. Evans, president of the Federal Reserve Bank of Chicago, and Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. In recent public remarks, both have said the Fed should wait to increase rates until there is clearer evidence that higher interest rates are needed to prevent inflation from rising too quickly.

What comes next?

With Wednesday’s rate increase a foregone conclusion — investors had put the chances at 100 percent — attention focused on what the Fed had to say about next year, particularly about the effect of the prospective tax cut.

“We continue to think that a gradual path of rate increases remains appropriate even with almost all participants factoring in their assessment of the tax policy, Ms. Yellen said.

Fed officials predicted that the tax cuts would deliver relatively modest economic benefits, adding a few tenths of a percentage point to the pace of growth.

Importantly, they also indicated that the economy had room to grow a little more quickly, and that they did not expect the stimulus to increase the pace of inflation.

Wall Street reacts.

Ian Shepherdson, chief economist, Pantheon Macroeconomics:

The key result of the growth revision to next year is that unemployment is now expected to end the year at 3.9 percent, down from the previous 4.1 percent. This looks hopelessly unrealistic to us. The Fed appears to be assuming either a surge in productivity growth or a leap in participation; they might happen but we think a more likely end-2018 unemployment rate is 3.5 percent or less; had the Fed forecast that, they would have had to put in another rate hike in the dot-plot for next year. The inflation forecasts for 2018-20 are all unchanged from September, despite the tighter labor market. In short, the Fed forecasts an endless expansion, with minimal inflation pressure, despite unemployment well below their ... estimate — unchanged at 4.6 percent — forever and interest rates peaking at 3.1 percent.

Luke Bartholomew, Aberdeen Standard Investments investment strategist:

Today was never really about the hike — that’s been in the bag for a while — it’s about what the Fed does next. 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.

Andrew Wilson, co-head of fixed income at Goldman Sachs Asset Management:

In 2018 we think that Powell will mirror Janet Yellen’s approach in 2017 and deliver three rate rises — more than the market is currently pricing in. Market expectations for United States monetary policy are in our view too dovish, creating room for a pickup in market volatility should the current Fed trajectory for rate hikes be recalibrated higher. Investors will be watching closely to see whether the Fed will be reactive to signs of higher inflation or pause to reassess its inflation outlook.

A changing of the guard.

The Fed’s course will be charted under new leadership. Ms. Yellen is scheduled to preside at one more meeting of the monetary policy committee, in late January, before stepping down in early February — assuming that President Trump’s nominee to succeed her, Jerome Powell, is confirmed.

Other senior officials also have recently departed or are planning to do so.

Stanley Fischer resigned as the Fed’s vice chairman in October. William C. Dudley, the president of the Federal Reserve Bank of New York, has said he plans to step down in mid-2018.

Replacements for Mr. Fischer and Mr. Dudley have not been announced, but Mr. Trump has already nominated a pair of new Fed governors: Randal K. Quarles, already installed as the vice chairman of supervision, and Marvin Goodfriend, who is awaiting Senate confirmation.

And three more of the seven seats on the Fed’s board remain open and ready for Mr. Trump to fill.