MNI ANALYSIS: FOMC Hikes; Dots Higher; Hawkish Econ Outlook>

--Forecasts Stays at 3 Hikes In 2018; Sees 3 In 2019; 2 in 2020

--Infl to Rise; Sees Core Infl Overshoot 2% in 2019-2020

--Sees Unempl Fall to 3.6% in 2019-2020; Natural Rate Tenth Lower

--Marks Up GDP Growth Forecast to 2.7% in 2018 Vs 2.5% Prev

By Jean Yung

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

rates by a quarter percentage point, as expected, and again pledged two 

more hikes this year, signaling that officials preferred to wait for 

stronger evidence that inflation was nearing their target before 

raising their forecast for 2018 rate hikes. 

     A strong labor market, rising inflation and an expected fiscal 

boost to growth were evident in the Fed's policy statement and upgraded 

economic forecasts, which now see GDP growth accelerating to 2.7% by the 

end of the year, unemployment falling to 3.8% and core inflation 

overshooting the Fed's 2% target in 2019 and 2020. 

     The update of the Federal Open Market Committee's Summary of 

Economic Projections, known as the dot plot, called for one more hike 

over the forecast horizon, compared to December. Officials see the 

federal funds rate in the 2.00% to 2.25% range by the end of the year, 

unchanged from December, but penciled in one more increase for 2019. 

Wednesday's move raises the target range to 1.50% to 1.75%.  

     Six out of 15 FOMC members, including nonvoters, expect three hikes 

to be appropriate this year, same as in December. But seven see four or 

more hikes, up sharply from four in December. The remaining two 

officials see no need for further rate hikes this year after Wednesday's 

increase. 

     Policymakers also projected further interest rate increases -- 

three in 2019 and two the year after, bringing the fed funds rate to 

3.4% by the end of 2020. That is half a percentage point above the 

FOMC's estimate of its neutral value, which at 2.9% is a tenth higher 

than December's estimate. 

     Ahead of the FOMC decision Wednesday, markets had priced in just 

two moves in 2019. 

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

economic outlook "has strengthened in recent months" and warned that 

inflation was expected to move up "in coming months." 

     The core personal consumption expenditures price index, the Fed's 

preferred measure of inflation, is seen ending the year at 1.9%, 

unchanged from December. But by the end of next year, officials expect 

it not only to meet but overshoot their 2% target, hitting 2.1% in 2019 

and 2020. 

     However, with core PCE inflation still sitting at just 1.5% in 

January, the FOMC again noted the soft inflation data and repeated it 

was "monitoring inflation developments closely." 

     The stance of monetary policy "remains accommodative, thereby 

supporting strong labor market conditions and a sustained return to 2 

percent inflation," the FOMC repeated. 

     Near-term risks to the outlook appear "roughly balanced," they 

said, same as in December. Growth is expected to "expand at a moderate 

pace in the medium term," the FOMC said, though recent data "suggest 

that growth rates of household spending and business fixed investment 

have moderated from their strong fourth-quarter readings." 

     Since the Fed last updated its projections in mid-December, 

Congress passed a tax overhaul and massive spending bills, both of which 

are expected to lift the growth outlook and stoke inflationary pressures 

in an economy at full employment. 

     The FOMC now expects growth to hit 2.7% this year, up from 2.5% in 

December. That momentum should taper in 2019 to 2.4% and in 2020 to 

2.0%. U.S. GDP expanded at an annualized rate of 2.5% in the fourth 

quarter, above its estimated longer run rate of 1.8%, unchanged from 

December. 

     Officials also noted that job gains have been "strong" in recent 

months and revised lower by a tenth their estimate of the natural rate 

of unemployment to 4.5%. The unemployment rate, currently at 4.1%, is 

already four-tenths below that level, and the FOMC said Wednesday they 

expect it to sink further to 3.6% in 2019 and 2020, several tenths lower 

than they thought in December. 

     The decision to tighten policy Wednesday was unanimous.  

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

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