FOMC Raises Rates; Vote 7-2; Marks Up Growth; 3 Hikes in 2018>

--Forecasts 3 Hikes In 2018, 2 In '19, Unchg Vs Sept; 2 in 2020

--Lowers Unempl To 3.9% in 2018, 2019 Vs 4.1% Prev; Natural Rate Unchg

--Marks Up GDP Growth Fcast to 2.5% in 2018 Vs 2.1% Prev

--Core Inflation Forecasts Unchanged; Hits 2% Target in 2019

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve on Wednesday lifted interest 

rates by a quarter percentage point, as expected, but held fast to its 

earlier forecasts for rate hikes in the near term as Congress raced to 

pass tax reform before year-end and the economy continued to grow at a 

healthy pace. 

     The Federal Open Market Committee again signaled that three hikes 

remain likely next year. That officials revised little their policy 

outlook signaled they stayed cautious in judging the macroeconomic 

implications of the $1.5 trillion tax package, the details of which have 

yet to be finalized. 

     An update of the FOMC's Summary of Economic Projections, known as 

the dot plot, called for a federal funds rate in the 2.00% to 

2.25% range by the end of 2018, unchanged from September. Wednesday's 

move raises the target range to 1.25% to 1.50%.  

     Six out of 16 FOMC members, including nonvoters, expect three hikes 

to be appropriate next year, same as in September. Four see four or more 

hikes, down from five. Ahead of the FOMC decision Wednesday, markets had 

priced in just two moves next year. 

     Policymakers projected further interest rate increases -- two each 

in 2019 and 2020, bringing the fed funds rate just above the FOMC's 

estimate of its neutral value at 2.8%, unchanged from September. But 

whereas in September officials expected to raise rates to 2.9% to rein 

in inflation, now they see it necessary to lift rates to 3.1%. 

     In its post-meeting policy statement, the FOMC repeated that the 

stance of monetary policy "remains accommodative, thereby supporting 

strong labor market conditions and a sustained return to 2 percent 

inflation." 

     The wording marks a change from previous statements in which the 

committee said an accommodative stance will support "some further 

strengthening" in labor market conditions and signals officials deem the 

economy already at full employment. 

     The unemployment rate, currently at 4.1%, is already five-tenths 

below its natural rate of 4.6%, and the FOMC said Wednesday they expect 

it to sink further to 3.9% in 2018 and 2019 before reversing course. 

That is two-tenths lower than they thought in September. 

     The passage of the Republican tax plan is expected to have 

implications for monetary policy. It is expected to lift the growth 

outlook, potentially stoking inflationary pressures in an economy at 

full employment. But it was unclear from the policy statement or the SEP 

whether officials upgraded their economic forecasts to reflect the 

faster growth and a stronger labor market than expected or if 

policymakers factored in the potential effect of a tax reduction.     

     The policy statement made no mention of the pending tax 

legislation, stating only that "economic activity has been rising at a 

solid rate." The FOMC now expects growth to hit 2.5% this year and next, 

up from 2.4% and 2.1%, respectively, in September. That momentum should 

taper in 2019 to 2.1% and in 2020 to 2.0%. 

     U.S. GDP expanded at an annualized rate of 3.3% in the third 

quarter, well above its estimated longer run rate of 1.8%.  

     Yet, despite overall solid conditions, inflation has yet to hit the 

Fed's 2% goal. In its policy statement, the FOMC again noted the soft 

inflation data, reiterating that headline and core inflation had 

"declined" this year and are "running below 2 percent." 

     Officials forecast the core personal consumption expenditures 

price index, their preferred measure of inflation, to end the year 

at 1.5% before rising to 1.9% by end-2018 and hitting their target of 2% 

by 2019, same as in September. 

     "Inflation on a 12-month basis is expected to remain somewhat below 

2 percent in the near term but to stabilize around the Committees 2 

percent objective over the medium term," it said, repeating language 

from the November policy statement. 

     They said near-term risks to the outlook appear "roughly balanced." 

     Chicago Fed President Charles Evans and Minneapolis Fed President 

Neel Kashkari dissented from Wednesday's decision to tighten policy, 

preferring to keep rates steady. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: jean.yung@marketnews.com 

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