In a widely expected move, the Federal Reserve raised interest rates by 0.25% on Wednesday. The inflation forecast for next year also went up modestly, from 1.6 percent to 1.7 percent. The statement from the Fed was optimistic that the job market "will remain strong," which is an improvement over the conclusions held by the Oct. 31-Nov. 1 meeting that conditions "will strengthen somewhat further."
The Fed moved the target range from 1.25 percent to 1.5 percent. This is tied to a number of different debt instruments, such as credit cards and adjustable-rate mortgages. Another development was that Federal Open Market Committee members expect the gross domestic product next year to grow from an estimated 2.1 percent in September to 2.5 percent. This follows two consecutive quarters of 3 percent growth or higher. The committee estimates that the fourth quarter could hit that level as well.
Growth is projected to settle down to 2.1 percent in 2019 and 2 percent in 2020, even while both of these are above the 2 percent and 1.8 percent forecasts three months ago, respectively.
While the committee did not say why there is growth expected, departing Fed Chair Janet Yellen has expressed in speeches this year that she was optimistic that aggressive fiscal policy could help. Congress is negotiating a tax reform package that seeks to cut the corporate tax rate and taxes paid by many Americans.
Officials at the Fed cut their estimates for the unemployment rate, to 3.9 percent in 2018 and 2019, two-tenths below the previous numbers. The 2020 rate is expected to be 4 percent, down from 4.2 percent, while the longer-run outlook remained at 4.6 percent. The current unemployment rate is 4.1 percent.
According to CNBC’s Fed Survey, respondents were already bullish that interest rate hikes and tax cuts were imminent. Seeing that tax cuts are on the way, in addition to greater economic growth, Fed watchers responding to the survey believe that GDP will accelerate to nearly 3 percent in 2018 and 2019, (2.85 percent to be exact for both years) and inflation to go up by only 2.5 percent by 2019. Additionally, at 14.9 percent, the risk of recession is at the lowest point it has been in 2.5 years. Taxes and regulation, coupled with global economic weakness, are the biggest threats to the U.S. expansion.