The Economy

Fed Rate Hike Could Be First of Four in 2018

The latest 0.25% increase indicates the Fed's confidence that the GOP tax cuts and government spending will boost the economy and inflation.
Matthew HellerMarch 22, 2018

The U.S. Federal Reserve has raised interest rates to the highest level since 2008 as it continues to move away from fiscal stimulus amid a strengthening economy.

The increase in the benchmark federal-funds rate by a quarter percentage point to a range of 1.5% to 1.75% had been widely expected and economists believe it could be followed by as many as three more hikes this year.

“I think they will end up tightening four times this year, but they don’t have to signal that yet,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics, told The Washington Post.

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The Fed hasn’t increased rates four times in a year since 2006 and, in a news release Wednesday, it said only that it “expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.”

But of the 15 Fed board members, six anticipate the central bank will hike four times this year and one believes five hikes will be necessary.

Wednesday’s increase was the Fed’s first major decision since Jerome Powell replaced Janet Yellen as its chair. “Fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative,” he said in his first news conference.

Powell’s comments suggested the Fed is confident that the Republican tax cuts and government spending will boost the economy and inflation, which has remained stubbornly below the Fed’s 2% target.

Fed policymakers now project U.S. economic growth of 2.7% in 2018, up from the 2.5% forecast in December, and have also marked up growth for next year. The Fed’s preferred measure of inflation is expected to end 2018 at 1.9%.

“Inflation on a 12-month basis is expected to move up in coming months and to stabilize around [2%] over the medium term,” the Fed said.

If as some economists fear, the tax cuts and increased government spending cause the U.S. economy to overheat, that could require the Fed to accelerate the pace of rate hikes this year.