For the second time in three months, the Federal Reserve increased its benchmark interest rate a quarter point, amid rising confidence that the economy will continue to grow. On Wednesday, the Fed indicated that it still expects three moves. In its statement, the central bank noted that business investment has “firmed somewhat,” a slight upgrade from the characterization of “soft” after the January 31-February 1 meeting.
The move, which has been widely anticipated by financial markets, takes the overnight funds rate to a target range of 0.75 percent to 1 percent and sets the Fed on a likely path of regular hikes ahead.
The market expects the next hike to come in June and another in December. Those probabilities increased a bit after Wednesday’s decision.
The forecast for GDP gains in 2017 remains 2.1 percent, while 2018 was pushed up one-tenth to 2.1 percent. Longer-run growth estimates remained at 1.8 percent.
Inflation expectations remained in check as well, as the Federal Open Market Committee — the central bank’s policy-setting group — sees a slight rise in 2017 from 1.8 percent to 1.9 percent but the longer-run tending toward 2 percent.
“It is important for the public to understand that we’re getting closer to reaching our objectives,” Fed Chair Janet Yellen said in a news conference after the meeting.
News of the rate hike pushed government bond yields lower while major averages in the stock market moved higher.
“The market was bracing for a much more hawkish tone from the Fed. The early reaction looks to be one of relief, that the market’s worst fears were averted,” said Michael Arone, chief investment strategist at State Street Global Advisors.
Some market participants had feared that the statement and accompanying economic projections Wednesday would point to a more hawkish Fed, with a faster pace of rate hikes ahead. However, the closely watched “dot plot” that shows there was little change from each member’s expectations for where rates will be in coming years.
With a higher rate already baked into the market, investors were looking for clues about just how aggressive the central bank will be later on. Currently, the market expects the Fed to hike two more times this year, which was in line with the bank’s projections from December 2016.
“They met expectations perfectly,” said J.J. Kinahan, chief market strategist at TD Ameritrade. “They stayed to the script that Wall Street wanted to hear.”